Proposal #1 would extend trade credit to some customersthat previously have been denied credit because they wereconsidered poor risks. Sales are projected to increaseby $150,000 per year if credit is extended to these new customers.Of the new accounts receivable generated, 7% are projected to beuncollectible. Additional collection costs are projected to be 3%of incremental sales (whether they actually end up collected ornot), and production and selling costs are projected to be 80% ofsales. Your firm expects to pay a total of 40% of its income afterexpenses in taxes.
1)Compute the incremental income aftertaxes that would result from these projections:
2)Compute the incremental Return onSales if these new credit customers are accepted:
If the receivable turnover ratio is expected to be 3 to1 and no other asset buildup is needed to serve the newcustomers…
3)Compute the additional investment inAccounts Receivable
4)Compute the incremental Return on NewInvestment
5)If your company requires a 20% Rateof Return on Investment for all proposals, do the numbers suggestthat trade credit should be extended to these new customers?Explain.
