ABC Inc. grants credit terms of net 25. It is considering a new policy that involves more stringent credit terms: net 20. As a result, the price of its product will stay the same at $45. The expected sales will decrease by 2,000 per year to 10,000 units. Variable costs will remain at 37 per unit and bad debt losses can be reduced by $1,000 per year to $2,000. ABC Inc. will finance the additional investment in receivables using its line of credit, which charges 5 percent interest after tax, and its tax rate is 30 percent. Should ABC Inc. switch to the new policy?
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