Proposal 1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks Sales are projected to increase by $200,000 per year if credit is extended to these new customers Of the new accounts receivable generated, 6 are projected to be uncollectible Additional collection costs are projected to be 5 of incremental sales, and production and selling costs are projected to be 78 of sales Your firm expects to pay a total of 30 of its income after expenses in taxes Compute the incremental income after taxes that would result from these projections Compute the incremental Return on Sales if these new credit customers are accepted If the receivable turnover ratio is expected to be 5 to 1 and no other asset buildup is needed to serve the new customers Work Incremental Return on Sales 15400 200000 100 7 7 Incremental Return on Sales 7 7 Compute the additional investment in Accounts Receivable Work Additional investment in Accounts Receivable Sales receivable turnover ratio 200000 5 $40,000 Additional investment in Accounts Receivable $40,000 Compute the incremental Return on New Investment Incremental return on new investment 15400 40000 38 5 If your company requires a 20 Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers Explain Yes, Trade credit should be extended to these new customers Incremental return on new investment is greater than required rate of return of 20 Proposal 2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash It is estimated that establishing these collection centers would reduce the average collection time by 2 days (from 5 days to 3 days) If the company currently averages $20,000 in collections per day, how many dollars will this suggested cash management system frees up If all freed up dollars would be used to pay down debt that has an interest rate of 8 , how much money could be saved each year in interest expense Do the numbers suggest that this new system should be implemented if its total annual cost is $5200 Explain

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Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to

Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to increase by $200,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 6% are projected to be uncollectible. Additional collection costs are projected to be 5% of incremental sales, and production and selling costs are projected to be 78% of sales. Your firm expects to pay a total of 30% of its income after expenses in taxes.

Compute the incremental income after taxes that would result from these projections:

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Compute the incremental Return on Sales if these new credit customers are accepted:

If the receivable turnover ratio is expected to be 5 to 1 and no other asset buildup is needed to serve the new customers

Work:

Incremental Return on Sales = 15400 / 200000 * 100 = 7.7%

Incremental Return on Sales = 7.7

Compute the additional investment in Accounts Receivable

Work:

Additional investment in Accounts Receivable = Sales / receivable turnover ratio = 200000 / 5 = $40,000

Additional investment in Accounts Receivable = $40,000

Compute the incremental Return on New Investment

Incremental return on new investment = 15400 / 40000 = 38.5%

If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain.

Yes,

Trade credit should be extended to these new customers.

Incremental return on new investment is greater than required rate of return of 20%

Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 2 days (from 5 days to 3 days).

If the company currently averages $20,000 in collections per day, how many dollars will this suggested cash management system frees up?
If all freed up dollars would be used to pay down debt that has an interest rate of 8%, how much money could be saved each year in interest expense
Do the numbers suggest that this new system should be implemented if its total annual cost is $5200? Explain.