ABC Corp is considering an ‘easing’ of credit policy to expand sales. The following data has been assembled:
Additional Sales: $1,000,000
Production/marketing Costs= 60% of Sales.
Collection Costs = 12% of Sales.
Bad Debts= 16% of sales.
Tax Rate = 10%
Accts Receivable turnover = 5
Inventory Turnover= 4
Cost of Capital= 15%
1. Project Net Income (after taxes) on additional sales.
2. What is the additional required investment in Inventory?
3. What is the additional required investment in A/R?
4. What is the return on the total additional investment?
5. Should the company ease it’s credit policy?Justify response.