Star Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is
Question:
Star Animators, Inc. currently makes all sales on credit and offers no cash discount. The
firm is considering a 3 percent cash discount for payment within 10 days. The firm's
current average collection period is 90 days, sales are 400 films per year, selling price is
$25,000 per film, variable cost per film is $18,750 per film, and the average cost per film
is $21,000. The firm expects that the change in credit terms will result in a minor increase
in sales of 10 films per year. Assuming that 75 percent of the sales will take the discount,
and the average collection period will drop to 30 days. The firm's bad debt expense is
expected to become negligible under the proposed plan. The bad debt expense is
currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20
percent, should the proposed discount be offered?