Answered: A company with annual sales of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 into a cash flow spreadsheet.

Part B: Calculate the proposal's NPV, IRR, and NAB.

Part C: Should the company shorten its payment terms?

А
Old investment in A/R:
Daily sales
Average age of AIR
Variable cost %
Old investment in A/R
New investment in A/R:
Daily sales
Average age of AIR
Variable cost %
New investment in A/R
Net decrease in A/R
Profit on change in collection period:
New daily sales
Change in average age of AIR
Contribution margin %
Profit on change
Time Zero Amounts
Years 1 to Infinity
Admin oosts
Change in A/R
Profit on change in collection period
Other WIC change
Bad debts
Contribution margin
Total
Discounts
Тах on above
Total
NPV Caloulation:
Present value of cash inflows
Present value of cash outflows
Net Present Value
IRR Calculation:
Annual cashflow
Investment in A/R
Internal Rate of Return
NAB Calculation:
Allowed annual cost
Actual annual cost
Net Annual Benefit
B.

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