Question

The Danu Ltd is considering to introduce a cash discount. The company credit terms are “net 30” and would like to change to “1/15, net 30”. The current average collection period is 45 days and is expected to decrease to 20 days with the new credit terms. It is expected that 50% of customers will take the advantage of the changed credit terms. Danu’s annual sales are Rs. 8,000,000 and required rate of return is 13%. Assume corporate tax rate is 50%.

Note that Danu is not expecting any change of sales. The decision under the consideration will be analyzed in terms of cost of cash discount and saving of opportunity cost of reduced investment in receivables. Do the new credit terms are beneficial to the firm?

                                                                                                                                                                               

                                                                                                                                        

Answer 1

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