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    Credit Policies Should you adopt either the policy? Why?

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    2. Your company is considering a modification to your credit policy, as follows:

    Policy C-1
    Increases sales $5 million per year
    Average collection period for incremental sales = 45 days

    No bad-debt losses are expected.

    The company's variable cost of sales is 80%.

    Cost of capital is 20%

    Should you adopt either the policy? Why?

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    Solution Preview

    Increased sales = 5 million
    Increase in receivables = 5 million *45/360= 0.625 ...

    Solution Summary

    Reasoning and computation given.