Question 2

Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its customers take the full 30 days to pay.

a) What is the average receivables balance? What is the receivables turnover?

b) If Maddox offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $180,000 for your calculation of receivables.

c) If Maddox reduces its bank loans, which cost 12 percent, by the cash generated from reduced receivables, what will be the net gain or loss to the firm? Should it offer the discount?

d) Assume the new trade terms of 2/10, net 30 will increase sales by 20 percent because the discount makes Maddox price competitive. If Maddox earns 16 percent on sales before discounts, should it offer the discount?