Question

XYZ, Inc., is considering a change in its cash-only sales policy. The new terms of sale

     would be net one month. Based on the following information, determine if the

    company should proceed or not. Describe the buildup of receivables in this case. The

    required return is .95 percent per month.

	Current Policy	New Policy
Price per unit	$ 630	$ 630
Cost per unit	$ 495	$ 495
Unit sales per month	1,240	1,310

Answer 1

In Current policy, Profit per month will be 1240*(630-495)= $167400.

In New policy, it is said that new terms of sale would be net one month. So, customers will receive goods today and can pay to XYZ Inc. after one month. So, there will a buildup of receivables to the extent of monthly sales of the company. It will be 1310*630= 825300. Cost to XYZ today will be 1310*495= 648450. present value of revenue received by the company can be obtained by discounting with 0.95%. So, (1310*630)/1.09= 817533.43. So, present value of profit per month in New policy will be 817533.43-648450= $169083.43.

As present value of profit per month is more as per New policy, company should proceed with the new policy.