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# Ch028 - Chapter 28 Credit Management 28.1 North County...

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Chapter 28: Credit Management 28.1 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: (avg sales)(1 - credit policy discount) PV(policy) = avg days to pay 1+ (corporate discount rate) days in year First, find the PV of the current (old) policy: PV(Old) = \$10,000,000/365 \$26,954.18 1 0.1(60/365) = + 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: 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 10 50 1 0.1 1 0.1 365 365 \$26,901.49 = + + + = Because PV(Old) > PV(New), North County Publishing should not adopt the new policy. B-181

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28.1 (continued) Notice that the decision is independent of the level of credit sales, since you can factor out the level of sales:. \$10,000,000 1 PV(Old) = 60 365 1 0.1 365 + \$10,000,000 0.5(0.98) 0.5 PV(New) = + 10 50 365 1 0.1 1 0.1 365 365 + + Since we are only interested in the comparative value of these PVs and we have the same constant as the first term in both equations, we can remove it and rewrite them as: 1 PV(Old) = 0.9836 60 1 0.1 365 = + 0.5(0.98)
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Ch028 - Chapter 28 Credit Management 28.1 North County...

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