Question

A firm is considering relaxing its credit standards which will result in annual sales increasing from $1.50 million to $2.02 million. Costs of goods sold represent 49 percent of sales and the average collection period is expected to increase from 32 to 56 days. If the firm requires a return of 10.9 percent, what the cost of investing in the extra accounts receivables from the planned relaxation of credit standards?

Answer 1

	A	Current annual sales	$1,500,000
	B=A*0.49	Current cost of goods sold	$735,000
	C	Collection period in days	32
	D=(B/365)*C	Investment in accounts receivable	$64,438
	E	Increased annual sales	$2,020,000
	F=E*0.49	Increased cost of goods sold	$989,800
	G	Increased collection period in days	56
	H=(F/365)*G	Investment in accounts receivable	$        151,860
	I=H-D	Increase in investment in accounts receivable	$          87,421
		Required vreturn=10.9%=	0.109
	J=I*0.109	cost of investing in the extra accounts receivables	$      9,528.93