Question

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I am requesting help with the following question. Can you please show the work on how to derive at the correct answer?

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Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks.   Sales are projected to increase by $200,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 6% are projected to be uncollectible. Additional collection costs are projected to be 5% of incremental sales, and production and selling costs are projected to be 78% of sales. Your firm expects to pay a total of 30% of its income after expenses in taxes.

1. Compute the incremental income after taxes that would result from these projections:

2. Compute the incremental Return on Sales if these new credit customers are accepted:

If the receivable turnover ratio is expected to be 5 to 1 and no other asset buildup is needed to serve the new customers…

3. Compute the additional investment in Accounts Receivable
4. Compute the incremental Return on New Investment

5. If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain.

Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 2 days (from 5 days to 3 days).

1. If the company currently averages $20,000 in collections per day, how many dollars will this suggested cash management system frees up?

2. If all freed up dollars would be used to pay down debt that has an interest rate of 8%, how much money could be saved each year in interest expense?

3. Do the numbers suggest that this new system should be implemented if its total annual cost is $5200? Explain.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

VPL x 3 ENG 06:44 1601 2020 E JW286 X for JO JP Q R S T JU JV JW JX JY Z KA KB KC KD KE A 263 264 265 266 LESS 267 LESS 268 269 270 271 272 INCREMENTAL SALES BAD DEBT INCREMENTAL REVENUE PRODUCTION COSTS COLLECTION COSTS INCREMENTAL INCOME BEFORE TAX TAXES INCREMENTAL INCOME AFTER TAX 200000 12000 [6% X 200000] 188000 156000 [78% X 20000] 10000 [5% X 200000] 22000 6600 (30% X 22000] 15400 LESS 1 2 INCREMENTAL RETURN ON SALES 7.70% [ =JW272/JW265] 277 RECEIVABLE TURNOVER RECEIVABLES = 200000/4 = 40000.00 (SALES/TURNOVER) 278 INCREMENTAL RETURN ON INVESTMENT = INCREMENTAL INCOME AFTER TAXE/RECEIVABLES* 100 INCREMENTAL RETURN ON INVESTMENT = 38.50% [ =JW272/JW277] 280 281 282 5 YES, AS INCREMENTAL RATE OF RETURN IS HIGHER THAN REQUIRED RATE OF 20% 283 284 285 286 287 288 289 290 FIFO CASH BUDGET budget 45 days cycle ROE, BV MV 1 alio VARIANCE DEP, OLFL alius DETROIT Moal B-Sprofil luss SALES BUDGET dupont | DIFF ANALYSIS ... :

06:49 VEL x 3 ENG 16 01 2020 E2 AH158 X V for - AC AD AE AF AG AH AI AJ AK AL AM AN AO AP AQ AR AS e 139 140 a 20000 X 2 = 40000 ADDITIONAL COLLECTION FREED UP FUNDS 40000 b 146 147 148 149 EARNING ON SHORT TERM INVESTMENTS = FREED UP FUNDS X RATE ON SHORT TERM INSTRUMENTS 40000 X 8% = 3200 150 NO, AS EARNINGS (3200) ARE LOWER THAN COST OF NEW SYSTEM (5200) 152 153 154 164 165 166 167 ... LOAN OPTIONS pv, lv, annuily CAP STRU VALUE PM, PMT loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPO NPER APR CPI ea PVA pva s2 53 ST.... 6