Question

Kamal Company produces and commercializes phones. Given the COVID-19 pandemic spread, the financial manager suggests extending the credit terms from "net 40" to "net 60" to stimulate sales. Kamal also benefits from relaxing of terms from its suppliers from "net 30" to "net 35". The manager is wondering how to estimate the financial impact of these new policies would have on the shareholders wealth. Following the extension of DSO, the daily sales increase at a growth rate equals 5%. The manager presents you the following information: Annual cost of capital = 15% Purchase amount = 60% of COGS amount COGS amount = 50% of sales amount Annual sales amount = $93,075,000 Inventory turnover =9.125

1- Calculate the daily NPV of the current terms.

2- Calculate the daily NPV of the proposed terms.

3- What is you reco dation? Explain. (3 points)

4 -Calculate the NPV of the Kamal's CCP aggregate (NPVecppregate of the present terms. Interpret your results.

Answer 1

sol:

1 Annual Sales = 93,075,000
COGS= 50% of Sales = 46,537,500
Profit = 46,537,500
Cost of capital = 15%
Daily NPV = $40,467,391.30

2)

If sales grow at 5%:
Annual Sales = 97728750
COGS= 50% of Sales = 48864375
Profit = 48864375
Cost of capital = 15%
Daily NPV = $42,490,760.87

3)

Given that NPV of proposed terms > NPV of current terms, we recommend the proposed terms.

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