TUTORIAL QUESTION WORKING CAPITAL MANAGEMENT 03 MAY 2018 Pulse Ltd have decided that they desperately need an increase in profits for their business to move forward. They have considered a number of options and the following appeals to them: to change the debtors' terms by extending the number of days for payment. Current information is as follows: Cash conversion cycle 45 days Inventory days 60 days Creditors' days See note Total sales for the current year R3 500 000 Gross profit percentage 20% Percentage cash sales at present 10% Note: Pulse Ltd's creditors have offered them a cash discount if they pay early. The terms are 2/10 net 45. They have chosen not to make use of the discount. Budgeted information if the proposal is implemented: Inventory days and creditors days will remain unchanged Debtors' days will change unfavourably by 15 days There will be no cash sales as all customers will purchase on credit 2% of all sales will result in bad debts, they currently experience 1% bad debts They expect a 15% increase in sales as a result of changing the payment terms The required rate of return is 14% REQUIRED 1. Calculate the current debtors' days. (2) 2. Assume that the current debtors' days are 30 days; calculate the investment in debtors at present (before the proposed change). (3) 3. Advise the management of Pulse Ltd whether they should implement the change or not. In your answer calculate whether a net increase or decrease in profit will occur by considering the following: change to the cost of investment in debtors, bad debts and increase in sales. (7)
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