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Read the case studyl scenario below and answer the questions based on the case study. Pern (Pty) Ltd is a company that operates in the
Read the case studyl scenario below and answer the questions based on the case study. Pern (Pty) Ltd is a company that operates in the fast-moving-consumer-goods (FMCG) industry. Due to COVID related lockdowns, the company has experienced various restrictions and reductions to liquidity and profitability. In an attempt to improve the company's liquidity, it has been proposed that early-settlement discounts are granted to debtors. It must be noted that no discounts are currently given and the credit term is presently 30 days. The details are as follows: . 2% discount if paid within 15 days, otherwise pay at 60 days. Current sales are R1.5million and debtors take 40 days to pay. Under the change, 60% of current debtors will take the discount and the rest will pay in 60 days. Sales are expected to increase by R500 000 if the policy is implemented. It is anticipated that 50% of the new debtors will take the discount and the rest will only pay in 75 days. Inventory to increase by R80 000. Accounts payable to increase by R30 000. Bad debts are expected to be increase by R50 000 due to the increased sales. WACC is 20% and the contribution ratio is 30%. . Evaluate whether the early settlement discount should be implemented. Your answer should include any relevant calculations and you can ignore the effects of taxation. [25 marks]
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