# Ross5eChap29sm - Chapter 29: Credit Management 29.1 The...

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Chapter 29: Credit Management 29.1 The interest rate for the term of the discount is: Interest rate = 0.02/0.98 Interest rate = 0.0204 or 2.04% And the interest is for: 40 – 9 = 31 days So, using the EAR equation, the effective annual interest rate is: EAR = (1 + Periodic rate) m – 1 EAR = (1.0204) 365/31 – 1 EAR = 0.2685 or 26.85% - If the discount rate is changed to 3%,: EAR increases. - If the credit period is increased to 60 days, EAR decreases. - If the discount period is increased to 15 days, EAR increases. 29.2 a. There are 30 days until account is overdue. If you take the full period, you must remit: Remittance = 200(\$95) Remittance = \$19,000 b. There is a 2 percent discount offered, with a 10 day discount period. If you take the discount, you will only have to remit: Remittance = (1 – 0.02)(\$19,000) Remittance = \$18,620 c. The implicit interest is the difference between the two remittance amounts, or: Implicit interest = \$19,000 – \$18,620 Implicit interest = \$380 The number of days’ credit offered is: Days’ credit = 30 – 10 Days’ credit = 20 days 29.3 The Prince Edward Potato 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: Answers to End–of–Chapter Problems B– 153

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( 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: 99 . 117 , 38 \$ ) 043 . 0 1 ( 365 / 000 , 000 , 14 \$ ) ( 365 / 54 = + = Old PV 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 0.54 (11 days) + 0.46 (T) = 32 days T = 57 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) 56 . 800 , 37 \$ ) 043 . 0 1 ( ) 365 / 000 , 000 , 14 (\$ 46 . 0 ) 043 . 0 1 ( 98 . 0 ) 365 / 000 , 000 , 14 (\$ 54 . 0 ) ( 365 / 57 365 / 11 = + + + = = x x x New PV Because PV(Old) > PV(New), Prince Edward Potato should not adopt the new policy. 29.4 The daily sales are: Daily sales = \$18,000 / 7 Daily sales = \$2,571.43 Since the average collection period is 29 days, the average accounts receivable is: Average accounts receivable = \$2,571.43(29) Answers to End–of–Chapter Problems B– 154
Average accounts receivable = \$74,571.43 29.5 If the credit terms are net 30 and accounts are 35 days past due on average, the average collection period is 65 days. Accounts receivable are 15 . 493 , 068 , 1 \$ ) 000 , 000 , 6 (\$ days 365 days 65 = 29.6 The company should adopt the new credit policy if its PV, PVNew, is greater than the PV of the current policy, PVOld. Note that we can write the general formula as: ( 29 + = year in days pay to days avg

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## This note was uploaded on 07/18/2010 for the course ECONMICS ECM359 taught by Professor Matazi during the Summer '10 term at University of Toronto- Toronto.

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Ross5eChap29sm - Chapter 29: Credit Management 29.1 The...

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