Fundamentals of Managing Finance Chap 12

A calculate the incremental cash flows from accepting

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Unformatted text preview: he company’s credit standards. The company forecasts that the new customers would purchase $80,000 per year, would pay in 75 days on average (assume a 360-day year), and would default on 8% of their purchases. It would cost $5,000 per year to administer the new accounts. The company’s variable costs average 80% of sales, it is in the 35% marginal tax bracket, and it has a 9% cost of capital. a. Calculate the incremental cash flows from accepting this proposal. b. Organize your cash flows from part a into a cash flow spreadsheet. c. Calculate the proposal’s NPV, IRR, and NAB. d. Should credit be extended to the new customers? 12. (Credit standards) A company is considering withdrawing credit from a group of customers who are not paying on time. These customers purchase $200,000 per year, pay in 120 days on average (assume a 360-day year), and default on 15% of their purchases. The company would save $15,000 in administrative costs per year and could reduce its idle cash balance by $5,000 if it terminated these accounts. The company’s variable costs average 60% of sales, it is in the 35% marginal tax bracket, and it has a 13% cost of capital. a. Calculate the incremental cash flows from accepting this proposal. b. Organize your cash flows from part a into a cash flow spreadsheet. c. Calculate the proposal’s NPV, IRR, and NAB. d. Should credit be withdrawn from these customers? 13. (Payment date) A company with annual sales of $5,000,000 is considering changing its payment terms from net 30 to net 45 to accommodate customers who are having difficulty in paying their bills. The com- pany forecasts that customers would respond by: (1) paying on day 50 rather than on day 40 as at present (assume a 360-day year), (2) increasing their purchases by $100,000 per year, and (3) reducing their bad debts to 1.4% of sales from 1.5% of sales. The company also forecasts that its idle cash balance would increase by $50,000 but administrative costs would be reduced by $20,000. The company’s variable costs average 75% of sales, it is in the 35% marginal tax bracket, and it has a 11% cost of capital. a. Calculate the incremental cash flows from accepting this proposal. b. Organize your cash flows from part a into a cash flow spreadsheet. c. Calculate the proposal’s NPV, IRR, and NAB. d. Should the company lengthen its payment terms? 14. (Payment date) A company with annual sales of $22,000,000 is considering changing its payment terms from net 40 to net 30 to encourage customers to pay more promptly. The company forecasts that customers would respond by paying on day 30 rather than on day 45 as at present (assume a 360-day year) but would decrease their purchases by $400,000 per year. The company also forecasts that its idle cash balance would decrease by $100,000 and administrative costs would be reduced by $50,000. The company’s variable costs average 65% of sales, it is in the 35% marginal tax bracket, and it has a 12% cost of capital. a. Calculate the incremental cash flows from accepting this proposal. b. Organize your cash flows from part a into a cash flow spreadsheet. c. Calculate the proposal’s NPV, IRR, and NAB. d. Should the company shorten its payment terms? 15. (Discounts) A company with annual sales of $2,500,000 on terms of net 30 and a collection period of 40 days (assume a 360-day year) is considering offering its customers terms of 2/15, net 30. The company forecasts that 60% of the customers would take the discount and pay on day 15 while the remaining 40% would pay on day 35 on average. Customers are also expected to increase their purchases by $100,000, and the company forecasts that its idle cash balance would decrease by $60,000. The company’s variable costs average 75% of sales, it is in the 35% marginal tax bracket, and it has a 10% cost of capital. a. Calculate the incremental cash flows from accepting this proposal. b. Organize your cash flows from part a into a cash flow spreadsheet. Chapter 12 c. Calculate the proposal’s NPV, IRR, and NAB. d. Should the company offer the discount? 16. (Discounts) A company with annual sales of $900,000 on terms of 2/10, net 30 is considering eliminating the discount and simplifying its terms of sale to net 30. Only 25% of customers take the discount and pay on day 10 (assume a 360-day year), the rest pay on day 30 on average. The company forecasts that if the discount were eliminated, its collection period for all sales would become 30 days, its idle cash balance would increase by $1,000, and administrative Investing in Permanent Working Capital Assets 309 costs would decrease by $3,000. The company’s variable costs average 70% of sales, it is in the 35% marginal tax bracket, and it has a 10% cost of capital. a. Calculate the incremental cash flows from accepting this proposal. b. Organize your cash flows from part a into a cash flow spreadsheet. c. Calculate the proposal’s NPV, IRR, and NAB. d. Should the company eliminate the discount?...
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This note was uploaded on 03/15/2013 for the course FIN 250 taught by Professor Kim during the Spring '13 term at Medgar Evers College.

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