QUESTION:

Bason Singh, a machine tool company, recently found out that one of its main competitors recently tightened its credi standards,Singh's Chief Operating Officer has asked you to make recommendations to the executive policy committee on whether the company should tighten its standards.The MArketing department estimates the annual sales will drop Ksh.20 million from the present level of Ksh.275 Million.The variable cost ratio is 0.7 and will not change , according to one of the cost accountants.Variable expenses related to the collection and credits administration are projected at 1.25% of salesunderthe existing standards but 1.45% of sales under the proposed standards.The bad debts expense rate in both existing and incremental (cost sales) is estimated to be 7%.The day sales outsatnding (DSV) of 56 days is not expected to change and can be applied to any sales gained or lost due to a cahnge in credit standards.The company's annual cost of capital is 15%.

Required.

i)Draw a cash flow timeline for 1 day's sale under the proposed Standards

ii) What is the value effect of this decision on 1 day's sales?

iii) What is the overall value effect (Change in NPV)?

iv) Are there any non-financial considerations , about which you believe the executive policy committee shaould be warned?