Question
Use the information provided below to answer the following questions: Redfern Traders is considering extending credit to customers in another district. Sales are expected to
Use the information provided below to answer the following questions:
Redfern Traders is considering extending credit to customers in another district. Sales are expected to increase by R600 000 if credit is granted to these customers. From the new accounts receivable generated, 15% is expected to be uncollectible. Additional collection costs are forecast at 8% of sales. The goods are expected to be sold at cost plus 50%. The firm is in the 30% tax bracket.
1. Calculate the after-tax profit on the new sales.
2. Suppose the only new investment in this case is the build-up in accounts receivable and that the turnover ratio is 5:1 between sales and accounts receivable. If the minimum required after-tax return is 15%, is this an acceptable investment? Motivate your answer.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started