QUESTION FOUR

Baines $($Pvt$)$ Company specifies payment from its customers at the end of the month following

delivery. On average customers take seventy days to pay. Sales total $$8$ million per year and bad

debts total $$\frac{40000}{?}$ year. The company plans to offer two percent cash discounts for payments

within thirty days. It is estimated that fifty percent of customers will take up the discount but the

remaining customers will take eighty days to pay up$.$ If the proposed scheme is implemented,

bad debts are expected to fall to $$20000$ and savings in credit administration of $$12000$ are

expected per annum. The firm can borrow or invest on the money market at $13\%$ per annum.

Required

Evaluate the proposed credit management system and advice on whether the company should

implement or not giving reason$($s$).(20$ marks$)$