Problem $7-26$

points

Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $$664,000.$ The company has a

$60\%$ cost of goods sold and will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each

is as follows:

Accounts receivable

Inventory

Plant and equipment

All $$664,000$ of the sales will be collectible. However, collection costs will be $3$ percent of sales, and production and selling costs will

be $76$ percent of sales. The cost to carry inventory will be $10$ percent of inventory. Amortization expense on plant and equipment will

be $6$ percent of plant and equipment. The tax rate is $30$ percent. Inventory is calculated using cost of goods sold and not sales.

a$.$ Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total

value of the investment made?

b$.$ Compute the accounts receivable collection costs and production and selling costs and add the two figures together.

c$.$ Compute the costs of carrying inventory.

Cost of carrying inventory

$

d$.$ Compute the amortization expense on new plant and equipment.

Amortization expense

$

e$.$ Add together all the costs in parts $b,c,$ and $d.$

Total cost $

f$.$ Compute income after taxes.

Income after taxes

$

g$.$ If the firm has required return on investment of $12$ percent, should it undertake the promotional campaign described throughout this

problem?

Yes

No

Problem $7-27$

In the previous problem, if inventory had only been $2$ times:

a$.$ What would be the new value for inventory investment?

Inventory investment $

b$.1$ What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work

toward computing income after taxes. $($Round the final answer to $1$ decimal place.$)$

Rate of return

$|\%$

b$.2$ Should the campaign be undertaken?

Yes

No