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Launch Inc is considering relaxing its credit standards to increase its currently sagging sales.

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
365-day year.)

Problem 3:

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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