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Question 12: Working Capital Management Jimmy Cricket Limited has annual sales revenue of $40 million. All sales made by the business are on credit and, currently, credit terms are negotiable by the clients. Presently, bad debts amount to $500,000 per year. On average the settlement period for accounts receivable is 80 days. The accounts receivables are financed through an overdraft facility with a 6% rate of interest per year Tho management s presenty reviewing the credit policies to determine if there is amore eficient ancd profitable alternative. Senio r management have only forwarded a single proposal to the board of directors concerning the management of credit. It is proposed that that clients should be given a 3% discount ifthey pay within 20 days. For those that do not pay within the required period, a maximum of 80 days credit will be given. The credit department believes that clients that account for 45% of the sales will take advantage of the discount by paying at the end of the discount period. The remaining clients will pay at the end of the 80 day limit. The credit department is of the opinion that bad debts can be effectively eliminated through the adoption of the revised policies, and by employing stricter credit investigation procedures that will cost an additional S1,200,000 per year The credit department is confident that the proposed policy changes will not impact sales revenue. Required: Calculate the net annual cost (savings) to the company of abandoning its existing credit policies in favor of adopting the alternative proposal for credit control