Calculate the proposal\'s NPV, IRR, and NAB. Should credit be extended to the ne

Question

Calculate the proposal's NPV, IRR, and NAB. Should credit be extended to the new customers? (Credit standards) A company is considering withdrawing credit from a group of customers who are not paying on time. These customers purchase $200,000 per year, pay in 120 days on average (as-sume a 360-day year), and default on 15% of their. purchases. The company would save $15,000 in administrative costs per year and could reduce its idle cash balance by $5,000 if it terminated these accounts The company's variable costs average 60% of sales, it is in the 35% marginal tax bracket, and it has a 13% cost of capital. Calculate the incremental cash flows from accepting this proposal. Organize your cash flows from into a cash flow spreadsheet. Calculate the proposal's NPV, IRR, and NAB. Should credit be withdrawn from these customers? (Payment date) A company with annual sales of

Explanation / Answer

a&b Icremental cash flows Net benefits if continue the customer Sales to the customer $200,000.00 Less: Variable cost ($120,000.00) Contribution $80,000.00 Less: Loss of Variable cost on Default amount ($200000*15%) ($30,000.00) Less: Interest amount (120000*13%*120/360) ($5,200.00) Net benefit due to sales made to that customer $44,800.00 Less: Tax ($15,680.00) Net savings $29,120.00 Net benefits if not continue the customer Administrative cost $15,000.00 Interest on administrative cost $1,950.00 Interest savings on Variable cost (200000*60%*13%*120/360) $5,200.00 Interest savings on cash balance (5000*13%*120/360) $216.67 Savings in Tax $15,680.00 Savings if proposal accepts $38,046.67 Incremental cash flows (38046.67-29120) $8,926.67 d Since the incremental cash flows are positive, credit shall be with drawn

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.