Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed​ relaxation, sales are expected to increase by 20​% from 10,000 to 12,000 units during the coming​ year; the average collection period is expected to increase from 30 to 45​days; and bad debts are expected to increase from 1​% to 3​% of sales. The sale price per unit is $45​, and the variable cost per unit is $34. The​ firm's required return on​ equal-risk investments is 10.3​%. Evaluate the proposed​relaxation, and make a recommendation to the firm.  ​(​Note: Assume a​ 365-day year.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Relaxation of credit standards   Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed​ relaxation, sales are expected to increase by 20​% from 10,000 to 12,000 units during the coming​ year; the average collection period is expected to increase from 30 to 45 ​days; and bad debts are expected to increase from 1​% to 3​% of sales. The sale price per unit is $45​, and the variable cost per unit is $34. The​ firm's required return on​ equal-risk investments is 10.3​%. Evaluate the proposed​relaxation, and make a recommendation to the firm.   ​(​Note: Assume a​ 365-day year.)
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