Question
QQQ Bhd., is being offered the terms of sale of 1/7, net 21 by a supplier. (a) What is the EAR of the cost to
QQQ Bhd., is being offered the terms of sale of 1/7, net 21 by a supplier.
(a) What is the EAR of the cost to QQQ Bhd., if the offered credit is taken up?
(b) If QQQ Bhd., can borrow short-term funds from a bank at the EAR interest rate of 9%, what should QQQ Bhd., do? Explain briefly.
QQQ Bhd., currently sells 14,600 units of product per year using a cash-only sales policy. The cost per unit is RM16 while the price per unit is RM25. Ruby Bhd., is considering switching to a net 21-day credit policy. With this credit policy, Ruby Bhd., estimates that it can sell 14,965 units per year, at the price of RM24 per unit and cost of RM14 per unit. QQQ Bhd.s required return (EAR) on receivables is 8%.
(c) What is the NPV of QQQ Bhd., switching from the cash-only policy to the credit policy?
(d) Should QQQ Bhd., switch to the credit policy from the cash policy? Why? Explain briefly.
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