As the company accountant is currently on holiday you are required, by calculati
ID: 2425836 • Letter: A
Question
As the company accountant is currently on holiday you are required, by calculating net present value, internal rate of return and payback, to advise the company which option they should take.
You should also critically evaluate the other qualitative factors that might be taken into account in this decision.
Part B
BLC Ltd. has revenue of £500 million and sells all of its goods on credit to a variety of different wholesale customers. At the moment the company offers a standard credit period of 30 days. However, 70% of its customers (by revenue) take an average of 70 days to pay, while the other 30% of customers (by revenue) pay within 30 days. The company is considering offering a 2% discount for payment within 30 days and estimates that 80% of customers (by revenue) will take up this offer (including those that already pay within 30 days).
The Managing Director has asked the credit controller if the cost of this new policy would be worth offering. The company has a £80 million overdraft facility that it regularly uses to the full limit due to the lateness of payment and the cost of this overdraft facility is 15% per annum.
The credit controller also estimates that bad debt level of 2% of revenue would be halved to 1% of revenue as a result of this new policy.
Required
Calculate the value of trade receivables under the existing scheme and the proposed scheme at the year-end.
Explanation / Answer
Trade receivables under current policy Annual revenue USD 500 Million Calculation of average collection period:- Period (days) Weightage Product 70 0.7 49 30 0.3 9 58 Thus, under present scheme, average collection period is 58 days. Trade receivable = Revenue * Average collection period / 365 = 500*58/365 USD 79.45 million Trade receivables under new policy Annual revenue USD 500 Million Calculation of average collection period:- Period (days) Weightage Product 70 0.2 14 30 0.8 24 38 Thus, under new scheme, average collection period is reduced to 38 days instead of 58 days. Trade receivable = Revenue * Average collection period / 365 = 500*38/365 = USD 52 million (before deducting cash discount)
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