Problem 7-20 Credit policy decision with changing variables [LO7-4]

Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $108,000 in additional credit sales, 8 percent are likely to be uncollectible. The company will also incur $15,800 in additional collection expense. Production and marketing costs represent 71 percent of sales. The firm is in a 30 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 8 percent desired return. Assume the average collection period is 90 days. a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.)

b. Should credit be extended to the new group of customers?