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Question: The following table shows the sales from the present sales policy and Proposed Sales Policy for Moon rocks Co. for a number of years. Year Sales (Present Policy) Sales (Proposed Policy) 1 $20,000 $35,000 2 30,000 60,000 3 30,000 25,000 4 15,000 10,000 5 12,000 5,000 6 10,000 3,000 7 6,000 1,000 $123,000 $139,000 Present terms of sale have resulted in an accounts receivable turnover of 12 times per year and bad debt expenses of 2 percent of sales. The new terms of sale will result in an account receivable turnover of 4 times per year and bad debt expenses of 5 percent of sales. The approximate risk adjusted discount rate for this co. is estimated at 10% per year and inventory turnover will be 15 percent per year. Last year's gross sales were $10 million. No capital expenditure will be required under either policy, although the rate of production and length of production will affect the after-tax salvage value of existing fixed assets. After 7 years, sales are expected to be zero for either policy, and the product will be abandoned then in any case. The policy change is expected to increase sales from $123 million to $139 million over the life of the product. Assume the cost of goods sold is of 65% of sales. The recovery on equipment is expected to be $6000, $4800, $3840, $3072, $2458, $1966, $1573 throughout the upcoming years respectively from present policy and $ 6000, $4200, $ 2940, $2058, $1441, $ 1008, $706 throughout the upcoming years respectively from the proposed policy. Instructions: Which policy should the firm follow? Calculate the present value of termination under each policy Answer: Excel Sheet Question: The following table shows the sales from the present sales policy and Proposed Sales Policy for Moon rocks Co. for a number of years. Year Sales (Present Policy) Sales (Proposed Policy) 1 $20,000 $35,000 2 30,000 60,000 3 30,000 25,000 4 15,000 10,000 5 12,000 5,000 6 10,000 3,000 7 6,000 1,000 $123,000 $139,000 Present terms of sale have resulted in an accounts receivable turnover of 12 times per year and bad debt expenses of 2 percent of sales. The new terms of sale will result in an account receivable turnover of 4 times per year and bad debt expenses of 5 percent of sales. The approximate risk adjusted discount rate for this co. is estimated at 10% per year and inventory turnover will be 15 percent per year. Last year's gross sales were $10 million. No capital expenditure will be required under either policy, although the rate of production and length of production will affect the after-tax salvage value of existing fixed assets. After 7 years, sales are expected to be zero for either policy, and the product will be abandoned then in any case. The policy change is expected to increase sales from $123 million to $139 million over the life of the product. Assume the cost of goods sold is of 65% of sales. The recovery on equipment is expected to be $6000, $4800, $3840, $3072, $2458, $1966, $1573 throughout the upcoming years respectively from present policy and $ 6000, $4200, $ 2940, $2058, $1441, $ 1008, $706 throughout the upcoming years respectively from the proposed policy. Instructions: Which policy should the firm follow? Calculate the present value of termination under each policy Answer: Excel Sheet

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