Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide
a. Calculate the incremental income after taxes and the
b. Calculate the incremental income after taxes and the return on incremental investment if 15 percent of the new sales prove to be uncollectible. Should credit be extended if 15 percent of the new sales prove uncollectible?
c. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible. Should credit be extended if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible (as in part a)?
Want to see the full answer?
Check out a sample textbook solutionChapter 7 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
- Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000 in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72 days. a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) Return on incremental investment % b. Should credit be extended to the new group of customers? No Yesarrow_forwardSlow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 120 days. a. Compute the return on incremental investment b. Should credit be extended? 1 i B IF T 111arrow_forwardToy Kingdom is evaluating the extension of credit to a new group of customers. Although these customers willprovide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% taxbracket and has a receivables turnover of six times. No other asset buildup will be required to service the newcustomers. The firm has a 10% desired return on investment.a. Should it extend credit to these customers?b. Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?arrow_forward
- Butler Corp. (BC) sells its stainless-steel products on terms of “2/10, net 40”. BC is considering granting credit to retailers with total assets as low as $400,000. Currently the lowest asset limit is $850,000. BC believes sales will increase $10 million from the new credit group but the average collection period for this new group will be 80 days versus the current average collection period of 30 days. If management estimates that 40% of the new customers will take the cash discount and 10% of the new business will be written off as bad-debt loss, should BC lower its credit standards? Assume BC’s variable cost ratio is 0.80 and its required pretax rate of return on current assets investment is 14%. BC also estimates that an additional investment in inventory of $750,000 is necessary for the anticipated sales increasearrow_forwardSunny Manufacturing is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $220,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 70 percent of sales. a. Compute the incremental income before taxes. $ Incremental income before taxes b. What will the firm's incremental return on sales be if these new credit customers are accepted? (Round the final answer to 2 decimal place.) Incremental return on sales % c. If the receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Sunny Manufacturing's incremental return on new average investment be? (Do round intermediate calculations. Round the final answer to the nearest whole percentage.) Incremental return on new average investment %arrow_forwardeEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $55,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $61,500 per year. The firm’s cost of capital (discount rate) is 11%. The firm is in the 30% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.arrow_forward
- The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay payment for an additional 15 days - paying in 45 days and thus becoming 15 days past due - without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? O 37.35% O 32.22% O 102.12% O 10.21% O 14.35%arrow_forwardJamboo Corporation is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $230009 if credit is extended. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 75 percent of sales. The firm needs to pay 1,500 tax on additional sales. Compute Net income after tax. ANSWER FORMAT: 1234.56 Answer:arrow_forwardBuild Corporation wants to purchase a new machine for $287,000. Management predicts that the machine can produce sales of $216,000 each year for the next 8 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $73,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Build's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 10% on all investments. What is the payback period for the new machine (rounded to nearest one-tenth of a year)? (Assume that the cash inflows occur evenly throughout the year.)arrow_forward
- Build Corporation wants to purchase a new machine for $295,000. Management predicts that the machine can produce sales of $187,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $69,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Build's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 13% on all investments. What is the net after-tax cash inflow in Year 1 from the investment?arrow_forwardHenderson Office Supply is considering a more liberal credit policy to increase sales but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset buildup will be required to service the new accounts. Assume that Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is two times. d. What would be the total incremental investment in accounts receivable and inventory needed to support a $65,000 increase in sales?arrow_forwardThe Berndt Corporation expects to have sales of $15 million. Costs other than depreciation are expected to be 80% of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Brendt's federal-plus-state tax rate is 40%. Berndt has no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X THAAL Open spreadsheet a. Set up an income statement. What is Berndt's expected net cash flow? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ b. Suppose Congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operations occurred. What is Berndt's expected net cash flow? Round your answer to the nearest dollar. $ c. Now suppose that Congress changed the…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT