Question

CURRENT SITUATION FOR DYL PICKLE COMPANY:

So = Current sales = $15 million.

V = Variable costs as a % of sales = 70% = 0.7.

1 - V = Contribution margin = 30% = 0.3.

k = Cost of capital invested in receivables = 15% = 0.15.

ACPo = Average collection period = 30 days. (Note: the credit period is 25 days, i.e., net 25.)

Bo = Bad debt loss percentage = 3% = 0.03.

Do = Discount percentage = 1%. (1/10 net 30)

Probability of taking old discount = 20%

Actual credit period for those not taking discount = 40 days

1. What is the existing (old) actual credit period? (remember this is a weighted average calculation)

2. It is proposed that the company offer a new discount of 2/10 net 30. It is expected that 40% of customers will take the discount. It is assumed that the actual credit period for those not taking the discount is 40 days.

What is the new actual credit period?

3. What is the total change in investment? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)

4. What is the total change in profits if we assume the bad debt percentage drops to 2% for all sales? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)

5. What is the NPV of this proposed change? (enter answer without commas and if the answer is negative use the minus sign, i.e., -155555)

Answer 1