To evaluate: The credit policy of the firm
Introduction:
Credit policy refers to a set of procedures that include the terms and conditions for providing goods on credit and principles for making collections.
Answer to Problem 2M
It is plausible, when the administrative costs and default probability rate of option 2 are lesser than option 3. Option 2 extends the period of credit and Option 3 extends the period of credit and relaxes the policy.
This relaxation may increase the default probability rate because it will include firms with lesser credit ratings who are less likely to pay. As a result, it will increase the costs of administration of managing the fraudulent accounts.
Explanation of Solution
The formula to calculate the average daily sales under current policy:
Hence, the average sales under current policy is $394,520.55.
The formula to calculate average daily variable costs under current policy:
Hence, the variable costs under current policy is $177,534.25.
The formula to calculate the average daily default under current policy:
Hence, the average daily default under current policy is $6312.33.
The formula to calculate average daily administrative cost under current policy:
Hence, the average administrative costs under current policy is $8,679.45.
The formula to calculate the interest rate for the collection period:
Hence, the interest rate is 0.61%.
The formula to calculate the
Hence, the NPV under current policy is $32,936,321.48.
Option 1:
The formula to calculate the average daily sales under option 1:
Hence, the average daily sales under option 1 is $460,273.97.
The formula to calculate average daily variable costs under option 1:
Hence, the average daily variable costs under option 1 is $207,123.29.
The formula to calculate average daily default under option 1:
Hence, average daily default under option 1 is $11,506.85.
The formula to calculate average daily administrative cost under option 1:
Hence, the average daily administrative costs under option 1 is $14,728.77.
The formula to calculate interest rate for the for collection period:
Hence, the interest rate is 0.659%.
The formula to calculate the net present value (NPV) under option 1:
Hence, the NPV under option 1 is $34,226,117.98.
Option 2:
The formula to calculate the average daily sales under option 2:
Hence, the average daily sales under option 2 is $452,054.79.
The formula to calculate average daily variable costs under option 2:
Hence, the average daily variable costs under option 2 is $203,424.66.
The formula to calculate average daily default under option 2:
Hence, the average daily default under option 2 is $8,136.99.
The formula to calculate average daily administrative cost under option 2:
Hence, the average daily administrative costs under option 2 is $10,849.32.
The formula to calculate interest rate for the for collection period:
Hence, the interest rate is 0.852%.
The formula to calculate NPV under option 2:
Hence, the NPV under option 2 is $27,632,189.89.
Option 3:
The formula to calculate the average daily sales under current policy:
Hence, the average daily sales under option 3 is $493,150.68.
The formula to calculate average daily variable costs under option 3:
Hence, the average daily variable costs under option 3 is $221,917.81.
The formula to calculate average daily default under option 3:
Hence, the average daily default under option 3 is $10,849.32.
The formula to calculate average daily administrative cost under option 3:
Hence, the average daily administrative costs under option 3 is $14,794.52.
The formula to calculate interest rate for collection period:
Hence, the interest rate is 0.792%.
The formula to calculate NPV under option 3:
Hence, the NPV under option 3 is $30,786,798.099.
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Chapter 20 Solutions
Fundamentals of Corporate Finance
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