The current credit terms: net 1/30 net 50. Half of our current customers take the cash discount and pay on the 30th day, whereas the other half pass the discount and pay on the 50th day.
The tax rate and pre-tax required rate of return of our company are 30% and 12%, respectively.
Now my proposed new credit policy: To tighten credit policy from the current terms net 1/30 net 50 to net 30 is shown as follows:
- Annual credit sales will decrease from 50 million to $45 million.
- The expected total expenses of the collection department will increase from $1,200,000 to $1,500,000.
- There is no need to change the level of average inventory.
- Use a 365-day year.
How I estimate the change of additional investment in account receivable and inventory?
See the attached Excel file.
Old investment in Receivables
= (Old Daily Sales *Old DSO)
It will be:
a) Half of the customer pay on 30th day
Thus the ...
The solution discusses the change of additional investment in account receivable.