00,000 is considering changing its ent terms from net 40 to net 30 to rage customers to pay more promp ompany forecasts that customers respond by paying on day 32 rathe
00,000 is considering changing its ent terms from net 40 to net 30 to rage customers to pay more promp ompany forecasts that customers respond by paying on day 32 rathe
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![A company with annual sales of
$22,000,000 is considering changing its
payment terms from net 40 to net 30 to
encourage customers to pay more promptly.
The company forecasts that customers
would respond by paying on day 32 rather
than day 44 as at present (assume a 360
day year) but would decrease their
purchases by $400,000 per year. The
company also forecasts that its idle cash
balance would decrease by $80,000 and
administrative costs would be reduced by
$30,000 per year. The company's variable
costs average 62% of sales, it is in the 35%
marginal tax bracket, and it has an 8% cost
of capital.
Part A: Calculate the incremental cash flows
from accepting this proposal, and organize
your cash flows from part A into a cash flow
spreadsheet.
Part B: Calculate the proposal's NPV, IRR,
and NAB.
Part C: Should the company shorten its
payment terms?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5308ff63-6992-4976-b5f2-eb4d810dee85%2F5883cc6e-e590-43cd-8261-313c794a423a%2Frw5mjz_processed.png&w=3840&q=75)
Transcribed Image Text:A company with annual sales of
$22,000,000 is considering changing its
payment terms from net 40 to net 30 to
encourage customers to pay more promptly.
The company forecasts that customers
would respond by paying on day 32 rather
than day 44 as at present (assume a 360
day year) but would decrease their
purchases by $400,000 per year. The
company also forecasts that its idle cash
balance would decrease by $80,000 and
administrative costs would be reduced by
$30,000 per year. The company's variable
costs average 62% of sales, it is in the 35%
marginal tax bracket, and it has an 8% cost
of capital.
Part A: Calculate the incremental cash flows
from accepting this proposal, and organize
your cash flows from part A into a cash flow
spreadsheet.
Part B: Calculate the proposal's NPV, IRR,
and NAB.
Part C: Should the company shorten its
payment terms?
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