Midwest Cattle Farm sells cattle to meat processing companies on credit term of net 30. Currently, the average collection period is 40 days and sales are $15 million. The firm is considering changing its credit term to net 45. The firm estimates that average collection period will increase by 15 days, sales will increase by 12%, and inventory will increase by $250,000. The firm has no bad-debt and expects the new credit period extension to have no effect on bad-debt. The firms variable cost ratio is 0.65 and its pretax required rate of return is 15%.

1. Determine the benefit of the additional sales.

2. Determine the cost of additional investment in accounts receivable.

3. Determine the cost of additional investment in inventory.

4. Determine the net effect of this credit period extension on pretax profit of Midwest Cattle Farm.