Question 8

KXP Co is an ebusiness that trades solely over the internet. In the last year, the company had sales of $15 million. All sales were on 30 days credit to commercial customers.

Extracts from the companys most recent statement of financial position relating to working capital are as follows:

Trade receivables ($000) = 2466

Trade payables ($000) = 2220

Overdraft ($000) = 3000

In order to encourage customers to pay on time, KXP Co proposes introducing an early

settlement discount of 1% for payment within 30 days, while increasing its normal credit period to 45 days. It is expected that, on average, 50% of customers will take the discount and pay within 30 days, 30% of customers will pay after 45 days, and 20% of customers will not change their current paying behaviour.

KXP Co has an overdraft facility charging interest of 6% per year.

Required:

Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on your findings.