FIN 200: Assignment Workbook Week 6 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 6 Solution

Week 6 Checkpoint: Credit Policy Decisions

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The Niara Corporation Office Supplies division is considering a more liberal credit policy to increase sales. Pertinant financial data follows:

Uncollectible Accounts 9%
Collection Costs (% of new sales) 6%
Production and Selling Costs (% of new sales) 65%
Accounts Receivable Turnover 3
Inventory Turnover 5
Income Taxes 35%
Sales Increase $ 45,000
No other asset buildup will be required to service the new accounts

a. What is the level of accounts receivable to support this sales expansion?
b. What would be The Niara Corporation’s incremental aftertax return on investment?
c. Should The Niara Corporation liberalize credit if a 15 percent aftertax return on investment is required?
d. What would be the total incremental investment in accounts receivable and inventory to support an increase in sales?
e. Given the income determined in part b and the investment determined in part d, should The Niara Corporation extend more liberal credit terms?

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