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BUSI 320 Comprehensive Problem 2 Spring2019

You have been asked to assess the expected financial impact ofeach of the following proposals to improve the profitability ofcredit sales made by your company. Each proposal is independent ofthe other. Answer all questions. Showing your work may earn youpartial credit.

Proposal #1 would extend trade credit to some customersthat previously have been denied credit because they wereconsidered poor risks. Sales are projected to increaseby $120,000 per year if credit is extended to these new customers.Of the new accounts receivable generated, 6% are projected to beuncollectible. Additional collection costs are projected to be 5%of incremental sales, and production and selling costs areprojected to be 80% of sales. Your firm expects to pay a total of30% of its income after expenses in taxes.

  1. Compute the incremental income after taxes that wouldresult from these projections:
  1. Compute the incremental Return on Sales if these newcredit customers are accepted:

If the receivable turnoverratio is expected to be 4 to 1 and no other asset buildup is neededto serve the new customers…

  1. Compute the additional investment in AccountsReceivable
  2. Compute the incremental Return on NewInvestment
  1. If your company requires a 20% Rate of Return onInvestment for all proposals, do the numbers suggest that tradecredit should be extended to these new customers?Explain.

Proposal #2 would establish local collection centersthroughout the region to decrease the time it takes to convertcredit payments that are mailed in by check to cash. It isestimated that establishing these collection centers would reducethe average collection time by 2 days.

  1. If the company currently averages $25,000 incollections per day, how many dollars will this suggested cashmanagement system frees up?

  1. If all freed up dollars would be used to pay down debtthat has an interest rate of 8%, how much money could be saved eachyear in interest expense?
  1. Do the numbers suggest that this new system should beimplemented if its total annual cost is $7200?Explain.

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Trinidad Tremblay
Trinidad TremblayLv2
28 Sep 2019

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BUSI 320 Comprehensive Problem 2 Spring 2019 You have been askedto assess the expected financial impact of each of the followingproposals to improve the profitability of credit sales made by yourcompany. Each proposal is independent of the other. Answer allquestions. Showing your work may earn you partial credit. Proposal#1 would extend trade credit to some customers that previously havebeen denied credit because they were considered poor risks. Salesare projected to increase by $120,000 per year if credit isextended to these new customers. Of the new accounts receivablegenerated, 6% are projected to be uncollectible. Additionalcollection costs are projected to be 5% of incremental sales, andproduction and selling costs are projected to be 80% of sales. Yourfirm expects to pay a total of 30% of its income after expenses intaxes. 1) Compute the incremental income after taxes that wouldresult from these projections: 2) Compute the incremental Return onSales if these new credit customers are accepted: If the receivableturnover ratio is expected to be 4 to 1 and no other asset buildupis needed to serve the new customers… 3) Compute the additionalinvestment in Accounts Receivable 4) Compute the incremental Returnon New Investment 5) If your company requires a 20% Rate of Returnon Investment for all proposals, do the numbers suggest that tradecredit should be extended to these new customers? Explain. Proposal#2 would establish local collection centers throughout the regionto decrease the time it takes to convert credit payments that aremailed in by check to cash. It is estimated that establishing thesecollection centers would reduce the average collection time by 2days. 1) If the company currently averages $25,000 in collectionsper day, how many dollars will this suggested cash managementsystem frees up? 2) If all freed up dollars would be used to paydown debt that has an interest rate of 8%, how much money could besaved each year in interest expense? 3) Do the numbers suggest thatthis new system should be implemented if its total annual cost is$7200? Explain.

Fast Turnstiles Co. is evaluating the extension of credit to anew group of customers. Although these customers will provide$234,000 in additional credit sales, 15 percent are likely to beuncollectible. The company will also incur $16,500 in additionalcollection expense. Production and marketing costs represent 70percent of sales. The firm is in a 30 percent tax bracket and has areceivables turnover of four times. No other asset buildup will berequired to service the new customers. The firm has a 10 percentdesired return.

a-1. Calculate the incremental income aftertaxes.



a-2. Calculate the return on incrementalinvestment. (Input your answer as a percent rounded to 2decimal places.)



a-3. Should Fast Turnstiles Co. extend credit tothese customers?

Yes
No



b-1. Calculate the incremental income after taxesif 18 percent of the new sales prove to be uncollectible.



b-2. Calculate the return on incrementalinvestment if 18 percent of the new sales prove to beuncollectible. (Input your answer as a percent rounded to 2decimal places.)



b-3. Should credit be extended if 18 percent ofthe new sales prove uncollectible?

Yes
No



c-1. Calculate the return on incrementalinvestment if the receivables turnover drops to 1.6, and 15 percentof the accounts are uncollectible. (Input your answer as apercent rounded to 2 decimal places.)



c-2. Should credit be extended if the receivablesturnover drops to 1.6, and 15 percent of the accounts areuncollectible?

Jericho Manufacturing developed a new wireless phone charger which also uses the excess heat generated during the process to keep your coffee warm at a predetermined temperature. The company is anxious to begin production of the new charger. To this end, marketing and cost studies have been made to determine probable costs and market potential. These studies have provided the following information:

New equipment would have to be acquired to produce the device. The equipment would cost $315,000 and have a 12-year useful life. After 12 years, it would have a salvage value of about $15,000.
Sales in units over the next 12 years are projected to be as follows:
Year

Sales in Unites

1

60,000

2

12,000

3

15,000

4-12

18,000



Production and sales of the charger would require working capital of $60,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the project’s life.
The devices would sell for $35 each; variable costs for production, administration, and sales would be $15 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $135,000 per year. The depreciation is based on cost less salvage value.
To gain rapid entry into the market, the company would have to advertise heavily. The advertising program would be:
Year

Annual Advertising Expenses

1-2

$180,000

3

$150,000

4-12

$120,000



The company’s board of directors has specified a required rate of return of 14% on all new products.
Requirements (Ignore income taxes)

You have been asked by your boss to evaluate the charger proposal from a capital budgeting perspective. You are to analyze the above data and prepare a memo to your boss recommending whether or not the company should accept the charger as a new product (5 points). Supplemental tables should be included in your memo as necessary to explain amounts included in the memo and support your recommendation.

As part of your evaluation, you should perform the following at a minimum.

Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the device for each year over the next 12 years. A table supporting this computation should be included. (10 points)
Using the data computed in (1) above and other data provided in the problem, determine each of the following for the proposed investment. Tables supporting each computation should be included as part of your memo, as necessary.
Net present value (10 points)
Internal rate of return (10 points)
Payback period (10 points)

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