Question
Sales are projected to increase by $120,000 per year if credit is extended to these new customers.Of the new accounts receivable generated, 6% are projected
Sales are projected to increase by $120,000 per year if credit is extended to these new customers.Of the new accounts receivable generated, 6% are projected to be uncollectible.Additional collection costs are projected to be 5% of incremental sales, and production and selling costs are projected to be 80% of sales.Your firm expects to pay a total of 30% of its income after expenses in taxes.
1)Compute the incremental income after taxes that would result from these projections:
2)Compute the incremental Return on Sales if these new credit customers are accepted:
If the receivable turnover ratio is expected to be 4 to 1 and no other asset buildup is needed to serve the new customers...
3)Compute theadditional investment in Accounts Receivable
4)Compute the incremental Return on NewInvestment
5)If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers?Explain.
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