Norton Wrench, a machine-tool company, recently found out that one of its main competitors has tightened its credit standards. Norton's chief operating officer has asked you to make a recommendation to the executive policy committee on whether the company should tighten its standards. The marketing department estimates that annual sales will drop $20000 from the present level of $275000. The variable cost ratio is .7 and will not change. Variable expenses related to collections and credit administration are projected at 1.25% of sales under the existing standards but 1.45% of sales under the proposed standards. The bad-debt expense rate on both existing and incremental (lost) sales is estimated or lost due to a change in credit standards. The company's annual cost of capital is 15%.

1. Norton Wrench - credit standards tightening.

Current Proposed

Terms (E) Terms (N)

Sales per 365-day year $275,000 $255,000

Sales per day, S $753.42 $698.63

Sales growth rate, g -7.27%

Up-front Variable Cost Ratio (VCR) 70.00% 70.00%

Collection expenses (EXP) at DSO 1.25% 1.45%

Bad debt expense ratio, b , at DSO 7.00% 7.00%

Discount percent, d 0 0

Discount period, days 0 0

Proportion taking discount, p 0 0

Non-discount period, days 56 56

k = company's annual nominal cost of capital 15%

i = daily cost of capital 15% / 365 = 4.1096%

a. What is the value effect (change in Z) of this decision on 1 day's sales?

b. What is the overall value effect (change in NPV?)

c. Should Norton Wrench change the terms?

Please show work and how to do it in Excel! Thank you.