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that offering the discount will increase sales of the finished product by 50 units
(from 1,100 to 1,150 units) per year but will not alter its bad-debt percentage.
MAX’s opportunity cost of funds invested in accounts receivable is 14%. Should
MAX offer the proposed cash discount? An analysis similar to that demonstrated
earlier for the credit standard decision, presented in Table 14.3, shows a net loss
from the cash discount of $6,560. Thus MAX should not initiate the proposed
cash discount. However, other discounts may be advantageous. 618 PART 5 Short-Term Financial Decisions Cash Discount Period
cash discount period
The number of days after the
beginning of the credit period
during which the cash discount
is available. The cash discount period, the number of days after the beginning of the credit
period during which the cash discount is available, can be changed by the financial manager. The net effect of changes in this period is difficult to analyze
because of the nature of the forces involved. For example, if a firm were to
increase its cash discount period by 10 days (for examp...
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