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CLARIFY Fahmi Enterprise has a cash-only sales policy. It is considering changing to a credit policy...

CLARIFY

Fahmi Enterprise has a cash-only sales policy. It is considering changing to a credit policy of net 30 days. Information related to the current and new policies is given in the table below. The required rate of return is 0.75 percent per month.

Current Policy

New Policy

Price per unit (RM)

15.00

15.50

Cost per unit (RM)

8.00

8.40

Unit sales per month

2,000

2,050

Perform an analysis to show whether or not Fahmi Enterprise should adopt the new policy?

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Answer #1

Under Current Policy:

Cost being incurred = 2000*8= $16000

Sales Revenue= 2000*15= $30000

Net Present Value= 30000-16000= $14000

Under New Policy:

Cost being incurred= 2050*8.4= $17220

Sales Revenue after one month= 2050*15.5= $31775

After discounting with required return of 0.75% per month, Sales Revenue= 31775/1.0075= $31538.46

Net Presnt Value= 31538.46-17220= $14318.46

As Net Present value is grearer under New Policy, Fahmi enterprise should adopt New Policy.

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