Under each of the two alternative proposals, what is the effective cost of foregoing the available discount for early payment. If potential credit customers can borrow from local banks at 7% or less, should they pass up the opportunity to take the discount? Use the below information to solve

Currently, Campagnola provides trade credit on terms of n/60. While the majority of customers pay (on average) in the allowed 60 days, about 40% of customers are paying 10 days late. Bad debt losses, which once averaged about 1%, have risen to 2% on average. A management consultant, hired by Campagnola, has recommended two possible changes to the credit terms. Proposal A: Offer a discount of 1% for early payment in 10 days (Terms of 1/10, n/60) Proposal B: Offer the discount, but reduce the net payment time (Terms of 1/10, n/30) If Proposal B is accepted, it is assumed that Sales will decrease by 5% relative to what is expected under the existing policy; changes in Inventory are assumed to be proportional to changes in Sales. If Proposal A is accepted, no reduction in Sales is expected. Under either proposal, bad debt losses are expected to go back down from 2% to the 1% seen in earlier years. If either proposal is accepted, it is expected that 50% of all customers will take the discount and pay in 10 days. Among those who do not take the discount, it is assumed that 60% will pay on time and 40% will pay 10 days late. Campagnola has a Cost of Capital of 11.2%

Income Statement Sales $1,170,000 COGS $819,000 Gross Profit $351,000 Fixed Expenses $187,200 EBIT $163,800 Interest Expense $33,800 EBT $130,000 Income Tax $45,500 Net Income $84,500 Balance Sheet Cash $52,000 Accounts Payable $83,200 Accounts Receivable 205,150 Notes Payable 156,000 Inventory 156,000 Total Current Liab. 239,200 Total Current 413,150 LTD 208,000 Equity 485,950 Total Assets $933,150 Total L&E 933,150