The Company is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The Company is currently debating whether to expand its sales to a new market. While the Company expects an extra $3 million in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. In addition, collection costs will be 3% on all new sales, and the Company production and selling costs are 80% of new sales. The Company tax rate is 30%.
a) Calculate additional net income from the new sales.
b) If the Company can turn its receivables over four times per year, what will its additional investment in accounts receivable be and what will the Company earn as an after-tax return on that investment?
c) The Company requires that any new project earn a minimum of 10% return on investment. Should the Company enter this new market?