Fitzgerald, Inc., currently has an all-cash credit policy. It is considering making a change in the credit
Question:
Fitzgerald, Inc., currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend? The required return is .85 percent per month.
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Step by Step Answer:
To make a recommendation we need to calculate the change in the net present value NPV of the companys cash flows under the two policies We can use the following steps to calculate the NPV Calculate the monthly revenue under each policy Current Policy 127 x 1320 167640 New Policy 129 x 1340 172860 Calculate the monthly cost of goods sold COGS under each policy Current Policy 94 x 1320 124080 New Policy 96 x 1340 128640 Calculate the monthly gross profit under each policy Current Policy 167640 124080 43560 New Policy 172860 128640 44220 Calculate the monthly cash inflows under each policy assuming 100 collection rate for the New Policy Current Policy 167640 New Policy 44220 x 1 001 x 30 4292660 Calculate the NPV of the cash inflows under each policy using the required return of 085 per month Current Policy 167640 1 000850 167640 New Policy 4292660 1 000851 172860 1 000851 21251743 Calculate the change in NPV Change in NPV NPV under New Policy NPV under Current Policy Change in NPV 21251743 167640 4487743 Based on this analysis the company ...View the full answer
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Dulal Roy
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Related Book For 
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
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