Assuming an 18 percent return can be earned on the freed-up funds, what is the return that can be earned under the three cash discount policies? 7.Subtract the cost of the cash discount (Question 4) from the return on the freed-up funds (Question 6) to determine the actual profitability or loss under the three cash discount policies. Which of the three policies is the most profitable? 8.After looking at all the data, Beth decides to only consider Alternatives 1 and 2. She decides that the 2/10, net 30 cash discount could increase credit sales by $1 million. The 1/10, net 30 is assumed to have no impact on sales. Assume a 9 percent before tax profit margin on the new sales. Also assume the 2 percent cash discount must be subtracted. Further, assume the new sales will require a new investment in accounts receivable of $27,750. These funds could earn 20% if invested elsewhere. (The 20% is return on investment, whereas the 9% referred to above is return on sales.) Under the new set of facts, is the 2/10, net 30 policy now superior to the 1/10, net 30 policy?

Take the profitability computed for the 2/10, net 30 policy in Question 7, and add to that the increased profitability (9% return minus costs) detailed above. Compare your new total answers for the profitability of the 2/10, net 30 policy to the answer for the 1/10, net 30 policy in Question 7.

Which policy should the firm choose?