ABC Corp is considering an ‘easing’ of credit policy toexpand sales. The following data has been assembled:
Additional Sales: $1,000,000
Production/marketing Costs= 60% of Sales.
Collection Costs = 12% of Sales.
Bad Debts= 16% of sales.
Tax Rate = 10%
Accts Receivable turnover = 5
Inventory Turnover= 4
Cost of Capital= 15%
Q1:Project Net Income (after taxes) on additionalsales.
Q2:What is the additional required investment inInventory?
Q3 :What is the additional required investment inA/R?
Q4 :What is the return on the total additionalinvestment?
Q5 :Should the company ease it’s credit policy?Justifyresponse.
