Van Doren Housing expects to have sales this year of $$10$ million under its current credit

policy. The present terms are net $30$ ; the days dales outstanding $($DSO$)$ is $40$ days; and the

bad debt loss percentage is $4$ percent. Also, Van Doren's cost of capital is $10$ percent, and its

variable costs total $55$ percent of sales. Since Van Doren wants to improve its profitability, a

proposal has been made to offer a $1\mathrm{.}5$ percent discount for payment within $10$ days; that is$,$

change the credit terms to $\frac{1\mathrm{.}5}{10},$ net $30.$ The consultants predict that sales would increase

by $$100,000,$ and that $40$ percent of all customers would take the discount. The new DSO

would be $30$ days, and the bad debt loss percentage on all sales would fall to $3$ percent. Use a

$360$ day year.

What are the incremental pre$-$tax profits from this proposal? Show your work for partial

credit.

$($Hint: create income statements for each policy to determine if the new policy is more

profitable$)$