Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collectionexpense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildupwill be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72days.a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-dayyear.)Return on incremental investment%b. Should credit be extended to the new group of customers?NoYes

Net sales = $288,000- (288,000*10%) = $259,200The production and marketing costs represent 70% of…

Answered: Slow Roll Drum Co. is evaluating the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 10P

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Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 120 days. a. Compute the return on incremental investment b. Should credit be extended? 1 i B IF T 111
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Toy Kingdom is evaluating the extention of credit to a new group of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment a) Should it extend credit to these customers? b) Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same? Kindly help me to solve this, thanks!
Animal Kingdom is evaluating the extension of credit to a new grouo of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset build up will be required to service the new customers. The firm has a 10% desired return on investment. Should it extend credit to these customers and should credit be extended if the receivables tumover drops to 1.5 and all other factors are the same? Can you please show me an explanation and a solution for this? Thank you so much!
Subject:- finance
Blossom Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will increase by $2 per unit. The original price per unit is $40. Expected sales will increase by 1,000 units per year. The original sales are 11.000 units. Variable costs will remain at $25 per unit and bad debt losses will amount to $2.000 per year. The firm will finance the additional investment in receivables by using a line of credit, which charges 5-percent interest. The firm's tax rate is 20 percent. Calculate the NPV. (Assume Blossom benefits from the credit policy change indefinitely.) (Round answer to 2 decimal places, e.g. 15.75. Enter negative amounts using either a negative sign preceding the number eg.-45 or parentheses eg.(45)) NPV $ 513836 Should the firm begin extending credit under the terms described? Yes
LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost $600, 000 if purchased. The CCA rate on the equipment is 30% and the salvage value after its five-year life will be $122,451. There are no capital gains or losses to worry about. The firm's corporate tax rate is 40% and its pre-tax cost of debt is 10%. WeLease Corp. has offered to lease the system to LNZ for payments of $102,000 per year for five years. These lease payments would be made at the START of the year. Now suppose that you are told that the lens - tinting equipment would bring LNZ after-tax cost savings of $5,000 per year for five years. If all other details are as given in the original question data, how would these cost savings affect the NAL for LNZ? A) The NAL would decrease by $25,000. B) The NAL would decrease by $21,062. C) The NAL would increase by $25,000. D) The NAL would increase by $21,062. E) The NAL would not be affected.
Dinshaw Company is considering the purchase of a new machine. The invoice price of the machine is $87,306, freight charges are estimated to be $2,620, and installation costs are expected to be $7,370. The annual cost savings are expected to be $14,980 for 11 years. The firm requires a 20% rate of return. Ignore income taxes. What is the internal rate of return on this investment? Internal rate of return % Round to 0 decimal placese
Price Corporation is considering selling to a group of new customers and creating new annual sales of $240,000. 3% will be uncollectible. The collection cost on all accounts is 6% of new sales, the cost of producing and selling is 83% of sales, and the firm is in the 22% tax bracket. What is the profit on new sales?
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $58,000 per year. The firm’s cost of capital (discount rate) is 11%. a.The firm is not yet profitable and therefore pays no income taxes. b.The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. c. The firm is in the 26% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. 1. What is the internal rate of return (IRR) of the proposed investment for…
Build Corporation wants to purchase a new machine for $298,000. Management predicts that the machine can produce sales of $215,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Build's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 10% on all investments. What is the net present value (NPV) of the investment, rounded to the nearest whole dollar? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end.
Build Corporation wants to purchase a new machine for $295,000. Management predicts that the machine can produce sales of $187,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $69,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Build's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 13% on all investments. What is the net after-tax cash inflow in Year 1 from the investment?

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