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Finance net income and receivables turnover

If a company can expect an extra $2 million in sales if it enters a new market and it knows that 15% of its sales will be uncollectible, collection costs will be 2% on all new sales, and the company's production and selling costs are 80% of sales and it also has a tax rate of 30%, what will the company's net income be.

Also, if the company turns its receivables over 4 times per year, what will its additional investment in accounts receivable be and what will they earn as an after tax return on investment.

I figured the net income to be $42,000 but am confused about receivables turning over 4 times per year. Would this be 2,000,000 x 4 with a net income of $168,000??

Solution Preview

I agree with your $42,000 calculation of net income. (Sales - 80% cost of sales - 15% uncollectible - 2% collection cost - 30% income, 2000000 - 1600000 - 300000 - 40000 - 18000 = $42000.)

The formula for ...

Solution Summary

The solution calculates the return on investment for increased sales given an acceptable rate of return and the company's normal accounts receivable turnover.