A company has annual credit sales of €10million, and a cost of capital of 7%. Atpresent the company's debtors take onaverage 45 days to pay for goods boughton credit. The company is considering adiscount scheme which it estimates wouldreduce the period taken by customers to 25days.Based on the limited information above,what would be the net effect of theproposed discount scheme on thecompany's profit and loss in a given year?Assume 360 days in a year.Saving of €555,556Saving of €48,611Saving of €38,889Saving of €1,000

Savings from Proposed scheme = Reduction in Accounts Receivable x Cost of Capital Reduction in…

Based on the limited information above, what would be the net effect of the proposed discount scheme on the company's profit and loss in a given year? Assume 360 days in a year. Saving of €555,556 Saving of €48,611 Saving of €38,889 Saving of €1,000

Based on the limited information above, what would be the net effect of the proposed discount scheme on the company's profit and loss in a given year? Assume 360 days in a year. Saving of €555,556 Saving of €48,611 Saving of €38,889 Saving of €1,000

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

A company has annual credit sales of €10
million, and a cost of capital of 7%. At
present the company's debtors take on
average 45 days to pay for goods bought
on credit. The company is considering a
discount scheme which it estimates would
reduce the period taken by customers to 25
days.
Based on the limited information above,
what would be the net effect of the
proposed discount scheme on the
company's profit and loss in a given year?
Assume 360 days in a year.
Saving of €555,556
Saving of €48,611
Saving of €38,889
Saving of €1,000

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