The Para Company sales are $2 Million. Its Variable costs are 65% of sales, and excess capacity would permit a substantial expansion in sales without additional fixed costs. Management is considering a change in credit policy, and you are asked to analyze the potential benefits sof the change. Currently, the company sells on terms of 2/10 net 30. Twenty percent of its customers take the discount with remaining paying on average in 40 days. Bad debt losses are running at 4% of sales. The costs of capital tied up in receivables is 15%.
PARA is considering changing the terms of trade from 2/10 net 30 to 5/10 net, net 30. Half of PARA’s customers will take the new discount and pay on the 10th day. The other half will have an ACP of 40 days. Sales will increase by $600,000 and bad debt losses will decline to 3% of total sales.
So we don’t have a carry through error, assume the OLD credit period was 35 and the new credit period is 30 days(not the answer to above questions)
Recall that the:
Change in investment =change associated with original sales + change from new sales
This question and the next question asked breaks the above equation into two parts and asks you to solve for each part separately. Assume a 360 day year.
What is the change in investement caused by our existing customers?
What is the new investment PARA will make in A/R because of NEW CUSTOMERS?
Change in profits = change due to sales +change due to bad debts+ change due to discounts
Without consideration of bad debts and the discount, What is the change in profits from new customers?
By how much will bad debts increase (positive answer) or decrease (negative answer) the profits you calculated in the previous question?
How much will the net effects (old discounts-new discounts) of the discounts have on the profits of PARA? If your answer is negative enter a negative number.
What is the Net Present Value of PARA’s Proposed investment in AR?