The Para Company sales are $2 Million. Its Variable costs are 65% of sales, and excess capacity would permit a substantial expansion in sales without additional fixed costs. Management is considering a change in credit policy, and you are asked to analyze the potential benefits sof the change. Currently, the company sells on terms of 2/10 net 30. Twenty percent of its customers take the discount with remaining paying on average in 40 days. Bad debt losses are running at 4% of sales. The costs of capital tied up in receivables is 15%.

PARA is considering changing the terms of trade from 2/10 net 30 to 5/10 net, net 30. Half of PARA's customers will take the new discount and pay on the 10^th day. The other half will have an ACP of 40 days. Sales will increase by $600,000 and bad debt losses will decline to 3% of total sales.

So we don't have a carry through error, assume the OLD credit period was 35 and the new credit period is 30 days(not the answer to above questions)

Recall that the:

Change in investment =change associated with original sales + change from new sales

This question and the next question asked breaks the above equation into two parts and asks you to solve for each part separately. Assume a 360 day year.

What is the change in investement caused by our existing customers?

Question 4:

What is the new investment PARA will make in A/R because of NEW CUSTOMERS?

Question 5:

Recall:

Change in profits = change due to sales +change due to bad debts+ change due to discounts

Without consideration of bad debts and the discount, What is the change in profits from new customers?

Question 6:

By how much will bad debts increase (positive answer) or decrease (negative answer) the profits you calculated in the previous question?

Question 7:

How much will the net effects (old discounts-new discounts) of the discounts have on the profits of PARA? If your answer is negative enter a negative number.

Question 8:

What is the Net Present Value of PARA's Proposed investment in AR?