Kate Hansen, the new credit manager of the Farpoint Communications, was alarmed to find that Farpoint sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $6 million, Farpoint currently averages 98 days of sales in accounts receivable. Hansen estimates that tightening the credit terms to 30 days would reduce annual sales to $5,580,000, but accounts receivable would drop to 37 days of sales and the savings on investment in them should more than overcome any loss in profit.

Farpoint's variable cost ratio is 80%, and taxes are 26%. If the interest rate on funds invested in receivables is 16%, should the change in credit terms be made?