Company C is considering a change to is sales policy. The current terms are Net,

Question

Company C is considering a change to is sales policy. The current terms are Net, 30 days. It is considering going to a cash-only sales policy. Based on the following, what do you recommend? The required rate of return is 2 percent per month.

Current Policy New Policy

Price per Unit $334 $330 Cost per unit $265 $260 Unit sales/Month 1,310 1,250

George and Georgette both graduated in Finance from IUPUI, and they found employment at Company | as Accounts Payable specialists. Because of Game 6 for the 2016 NBA Finals, they skipped class and now don't know how to deal with Trade Credit Terms. The company received the following note from

Explanation / Answer

The costs per period are the same whether or not credit is offered; so we can ignore the production costs.

The firm currently has sales of, and collects, $334 x 1310 = $437540 per period.

If cash-only sales policy is introduced, sales will fall to $260 x 1250 = $325000.

Defaults will be none, so the cash inflow under the new policy will be $325000.

The cost under the old policy was $265 x 1310 = $347150. The cost under new policy will be $260 x 1250 = $325000. The cost will be saved by $22150 per month. The NPV of savings is 22150/0.02 = $1107500

If the switch is made, De Long will give up this month’s revenues of $437540; so the NPV of the switch is $669960. So the NPV is positive. Thus, the change is a good idea.

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