Question

Use the following information to answer the next two questions.  

X-ray Inc. is a small manufacturing company. Currently, X-ray extends credit to its customers on a net 45 basis, but the company is having an issue with collecting payments in a timely manner. Currently, X-ray's customers pay 90 days (n=90) after being invoiced. X-ray is currently contemplating giving customers a 5% discount if they pay within 20 days of the invoice date. Currently, the average invoice amount is $12,000, but the company believes that the average invoice will grow to $12,300 if it provides a 5% discount. Futhermore, X-ray believes that 60% of its customers will pay in exactly 20 days (DSO=20) if the discount is introduced, while the remaining 40% will continue to pay 90 days after being invoiced. X-ray's annual cost of capital is 15%

1.What is the current present value of the average invoiced received by the corporation (ignoring the potential discount)? Round intermediate steps to four decimals.

a. 10,145.63

b. 13,018.32

c. 11,571.84

d. 11,782.03

2.Does it make financial sense for the company to pursue the 5% discount policy? Round intermediate steps to four decimals.

Yes

No

X-ray would be indifferent between using the discount policy and not issuing it.

Cannot be determined.

3.DEF Corp. believes its daily NPV will increase by $900 if it offers more lenient credit terms to its customers. DEF uses a 3% cost of capital for credit policy decisions. If the increased daily NPV continues indefinitely, what is the aggregate NPV of the decision to lower the company's credit standards? Assume a 365-day year.

24,200

11,315,000

30,000

10,950,000

4.Suppose a company is concerned about its short term liquidity. Which of the following actions could help alleviate liquidity concerns?

An increased usage of short term debt.

A shift from short term debt financing to long term debt financing.

Repurchase its shares in the open market.

All of the above.

Answer 1