TNT, Inc. currently has a credit policy of "net 45," but is considering changing the policy to "2/10 net 45." The firm does not expect the new policy to have any effect on its annual credit sales, which are $10,000,000. The new credit policy is estimated to decrease the average collection period from its present level of 62 days to 41 days. TNT also estimates that 57 percent of its
customers will take advantage of the cash discount. If the firm requires a 20 percent pretax return on its receivables investment, determine the impact the cash discount policy will have on the firm's pretax profits.
Reduction in Investments = (62-41)/365*10000000=575342.47- ( Reduction in days * Daily sales)
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This explains the impact of cash discount on the finances of the organization.