Existing Policy:

· 1/10 net 40 where 50% of customers take the discount; 50% pay on 40^th day
· Sales: $ 6 million/year; Bad debts: 2% of sales

Proposed Policy:

· 2/10 net 50 where 70% are expected to take the discount; 30% expected to pay on 50^th day
· Expected sales: $ 7 million/year; Bad Debts (expected): 4% of sales

Additional information: The companies’ variable costs are 60% of sales under both policies; Fixed costs are $1 million. Cost of funds remains 12%; Corporate tax rate: 30%. (5 Points)


a) Should the proposed policy be implemented? Justify your recommendation










b) What is EAR of existing policy?





c) Would you advise the company to eliminate all trade credit if it resulted in a drop of sales to $5 million? Why or why not?

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