Question 2 a) PNG ltd sells its service on credit at the rate of 6m a year. Customers take varying lengths of time to pay, but the average is 65 days. The business does not experience any significant level of bad debts because it spends 50,000 per annum on debt collection procedures.

PNG ltd is considering a proposal to introduce a cash discount of 2% of the amount due if customers pay within 30 days of the sale. It is estimated that 60% of customers would pay on the thirtieth day and claim the discount. The remaining customers would be the slower payers, and they would be expected to take an average 75 days to pay. The cost of debt collection procedures would be expected to fall to 20,000 a year. The cost of funds to finance the debtors is 12% per annum.

Required: In terms of effect on net profit (after interest, before tax) should the proposed debtor policy be introduced? (Support your answer with all the necessary calculations. You must show all your workings)