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Fin 200 Credit Policy Decisions

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Short-Term Financing

17. a. The level of accounts receivable needed to support this sales expansion is $16,000. The way I got this is by dividing the increase in sales ($80,000) by the percentage of new sales (5%). $80,000 / 5 = $16,000.

b. Collin’s Incremental After-Tax Return on Investment

Additional Sales……………………………………………............ $80,000
Accounts Uncollectible (9% of New Sales)……………………… 7,200
Annual Incremental Revenue…………………………………….. 72,800
Collection Costs (5% of New Sales)…………………………….. 4,000
Production and Collection Costs (78% of New Sales)………… 62,400
Annual Income Before Taxes……………………………………. 6,400
Taxes………………………………………………………………. 1,920
Annual Incremental Income After Taxes……………………….. $ 4,480

c. Yes, I believe that Collins should liberalize credit if a 15 percent after-tax return on investment was required because the above calculations show a 28% return on investments (profit).

d. The total incremental investment in accounts receivable and inventory to support an $80,000 increase in sales would be: $80,000 / 4 = $20,000. So the answer would be $20,000.

e. Let’s add the $16,000 from a/r to the $20,000 in inventory. If so then we would get $36,000. Next we’ll take $4,480 (incremental income after taxes) divided by the $36,000 incremental investment giving us a 12.44% return on investment. If this were the information we were to consider than Collins should NOT extend more liberal credit terms because 12.44% is less than a 15% return on investment or ROI as

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