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Ross4eChap29sm

# Ross4eChap29sm - Chapter 29 Credit Management 29.1 North...

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Chapter 29: Credit Management 29.1 North County Publishing Company should adopt the new credit policy if its PV, PV (New), is greater than the PV of the current policy, PV (Old). Note that we can write the general formula as: ( 29 + = year in days pay to days avg rate discount corporate 1 discount) policy credit - sales)(1 (avg PV(policy) First, find the PV of the current (old) policy: PV(Old) = (60/365) \$10,000,000/365 \$27,178.40 (1 0.05) = + Now, find the PV(New): Under the new policy, we expect 2 groups of customers -- a) those that take the discount and pay early, and b) those that do not take the discount and pay "late" (we will ignore those customers who take the discount and still pay late). Since we are only given the average collection for all customers, we need to find the average collection period for each group. For those who take the discount, we will assume they pay on day 10. Let T = the average number of days until payment for those customers who do not take the discount, and using the information given in the problem: 0.5 (10 days) + 0.5 (T) = 30 days T = 50 days Now apply this to our general formula for PV, allowing for the fact that we have two kinds of customers: 10 50 365 365 PV(New) = PV(from customers who take the discount) + PV(those who don't) \$10,000,000 \$10,000,000 0.5 (0.98) 0.5 365 365 (1 0.05) (1 0.05) \$13,4 = + + + = 06.72+13,607.38= \$27,014.10 Because PV(Old) > PV(New), North County Publishing should not adopt the new policy. Answers to End-of-Chapter Problems B-153

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29.1 (continued) Notice that the decision is independent of the level of credit sales, since you can factor out the level of sales:. 60 365 \$10,000,000 1 PV(Old) = 365 (1 0.05) + 10 50 365 365 \$10,000,000 0.5(0.98) 0.5 PV(New) = + 365 (1 0.05) (1 0.05) + + Since we are only interested in the
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Ross4eChap29sm - Chapter 29 Credit Management 29.1 North...

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