Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $600,000. The

Question:

Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $600,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:
Accounts receivable .........5x
Inventory ..........................Bx
Plant and equipment ........2x

All $600,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 77 percent of sales. The cost to carry inventory will be 6 percent of inventory. Amortization expense on plant and equipment will be 7 percent of plant and equipment. The tax rate is 30 percent.
a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. What is the total value of the investment made?
b. Compute the accounts receivable collection costs and production and selling costs and add the two figures together.
c. Compute the costs of carrying inventory.
d. Compute the amortization expense on new plant and equipment.
e. Add together all the costs in parts b, c, and d.
f. Subtract the answer from part e from the sales figure of $600,000 to arrive at income before taxes. Subtract taxes at a rate of 30 percent to arrive at income after taxes.
g. Divide the after tax return figure in partfby the total investment figure in part a. If the firm has required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem.

Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Foundations of Financial Management

ISBN: 978-1259024979

10th Canadian edition

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta

Question Posted: