Launch Inc is considering relaxing its credit standards to increase its currently sagging sales. Sales are expected to increase by 20% from 20,000 to 22,000 units during the coming year; the average collection period is expected to increase from 45 to 65 days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm’s required return on equal-risk investments is 25%.
Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a
Western Financial made a $150,000, 5-year discount loan at 8% interest, requiring a compensating balance equal to 20% of the face value of the loan.
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