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Use the following information for questions 19-21.

Your firm's CFO has tasked you

with evaluating the net present value associated with changing the firm's trade credit terms from net 30 days to net 45 days.Other pertinent assumptions include:

·     Annual sales with existing credit terms = $5,000,000

·     Variable cost ratio with existing credit terms = 30% of revenues

·     Costs of collections with existing credit terms = 1% of revenues

·     Bad debt expense ratio with existing credit terms = 2% of revenues

·     Annual sales with new credit terms = $5,500,000

·     Variable cost ratio with new credit terms = 30% of revenues

·     Costs of collections with new credit terms = 1% of revenues

·     Bad debt expense ratio with new credit terms = 3% of revenues

·     Discount rate = 10%

1.       What is the aggregate increase in net present value from making this change to trade credit policy?

 

2.       What is the optimal cash discount percentage with the following financial situation: Cash discount period=10 days, credit period=30 days, and annual cost of capital=22%.

 

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