A company is considering keeping the current credit policy or making a change in the policy.

A company’s current policy is 2/10net 30. The price of the products is $25.00 and with the discount is $24.50. Variable costs are $17.50 with or without the discount. Sales are currently 1,540 units and are expected to rise to 1,586 or about 3%. The actual default rate is 1.00% and R* is 1.50%.

How much is the NPV of for leaving the current policy unchanged?

It is considering increasing the discount to 3%. But the price not taking the discount had to remain $25 making the price with the discount lower, $24.25. The variable cost is expected not to change, $17.50. But with the extra discount bad debts are expected to increase from 1.00% to 1.25%. R* is 1/50%. With the 3% discount sales are expected to rise by about 5% from 1,540 to 1,617.

How much is the NPV with the increase in discount rate?

What do you recommend? Keep the existing policy 2% discount or the proposed policy with 3% discount? Why?

Answer rating: 100% (QA)

1 Given Current Sales 1540 units 25 with 2 discount per unit And default rate ... View the full answer