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 CashManagement System ProposalsBUSI 320 Comprehensive Problem2VersionCYou have been asked to assess the expected financial impact of each of the following proposals toimprove theprofitability of credit sales made by your company. Each proposal is independent of theother. Answer all questions. Showing your work may earn you partial credit.Proposal #1would extend trade credit to some customers that previously have been denied creditbecause they were considered poor risks.Sales are projected to increase by$160,000 per year ifcredit is extended to these new customers. Of the new accounts receivable generated,10% areprojected to be uncollectible. Additional collection costs are projected to be2% of incremental sales,and production and selling costs are projected to be 78% of sales. Your firm expects to pay a total of40% of its income after expenses in taxes.1)Compute the incremental income after taxes that would result from these projections:Losses on uncollectible items = 16,000Additional collection cost = 0.02 * 160,000= 3,200Income after expenses (production & selling cost) = (0.22 * 160,000) = 35,200Income after additional collection loss and cost = 35,200–19,200 = 16,0002)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 be4to 1 and no other asset buildup is neededto serve the new customers…3)Compute the additional investment in Accounts ReceivableAR increase = 160,000 /4= 40,0004)Computethe incremental Return on New Investment=16,000 /40,000 = 40%5)If your company requires a20% Rate of Return on Investment for all proposals, do thenumbers 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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University

Liberty University

Course

BUSI 320

Subject

Business Management

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

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