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BUSI 320 Financial Analysis of Trade Credit Extension and Cash Management System Proposals

This assignment analyzes financial aspects of trade credit extension and cash management proposals, evaluating their impact on business operations.

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    BUSI 320 Financial Analysis of Trade Credit Extension and Cash Management System Proposals BUSI 320 Comprehensive Problem 2 Version C You have been asked to assess the expected financial impact of each of the following proposals to improve the profitability of credit sales made by your company. Each proposal is independent of the other. Answer all questions. Showing your work may earn you partial credit. Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to increase by $1 6 0,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 10 % are projected to be uncollectible. Additional collection costs are projected to be 2 % of incremental sales, and production and selling costs are projected to be 7 8 % of sales. Your firm expects to pay a total of 40% of its income after expenses in taxes. 1) Compute the incremental income after taxes that would result from these projections: Losses on uncollectible items = 16,000 Additional collection cost = 0.02 * 160,000= 3,200 Income after expenses (production & selling cost) = (0.22 * 160,000) = 35,200 Income after additional collection loss and cost = 35,200 – 19,200 = 16,000 2) Compute the incremental Return on Sales if these new credit customers are accepted: Incremental return on sales = 16,000/160,000=10% If the receivable turnover ratio is expected to be 4 to 1 and no other asset buildup is needed to serve the new customers… 3) Compute the additional investment in Accounts Receivable AR increase = 160,000 /4 = 40,000 4) Compute the incremental Return on New Investment =16,000 /40,000 = 40% 5) If your company requires a 20 % Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain. Yes because the incremental return on new investment is higher

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