BUS 225 DAYONE LL
BUS 225 DAYONE LL
17th Edition
ISBN: 9781264116430
Author: BLOCK
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 7, Problem 20P

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?

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