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 360day 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 360day 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d. Should credit be withdrawn from these customers?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 360day 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 360day 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 360day 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 360day 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?...
View
Full
Document
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.
 Spring '13
 Kim
 Finance, Investing

Click to edit the document details