Unformatted text preview: after the proposed change? Answer: Current situation: the firm's average daily sales currently amount to $1,000,000/365 = $2,739.73. The DSO is 32 days, so accounts receivable amount to 32($2,739.73) = $87,671. However, only 75 percent of this total represents cash costs--the remainder is profit--so the investment in receivables (the actual amount that must be financed) is 0.75($87,671) = $65,753. At a cost of 12 percent, the annual cost of carrying the receivables is 0.12($65,753) = $7,890. New situation: the cost of carrying the receivables balance under the new policy would be $4,068: ($1,100,000/365)(15)(0.75)(0.12) = $4,068....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08