Assuming that Penn's cost of capital of 10% annually (consider 360 days a year), determine:

(a) NPV of current and proposed credit policy. 

(b) Do you recommend Penn Crop to change the current credit policy? If yes, what is the value of such policy, then? 

The ongoing global pandemic has troubled Penn Corp partially in its ability to manage receivables collection. While the industry days sales outstanding (DSO) is 25 days, Penn's credit policy allows an average DSO of 42 days. Therefore, Penn is planning to tighten its credit policy to improve receivables collection for the domestic market and bring the DSO to 31 days. Relevant information regarding its' current and estimate of the proposed credit policy credit policy is presented below:
 

General Credit Information	Existing	Proposed
Credit Terms	2/10, net 45	2/10, net 31
DSO for all customers (Days)	42	31
Discounted customers' (10%) DSO	10	10
Non-discounted customers' (90%) DSO	45.5	33

The effects of such tightening of credit policy has been provided below:

Daily credit sales & costs	Existing	Proposed
Net Sales	$500,000	$480,000
Amount paid by discount customers	$50,000	$50,000
Amount to be paid by non-discount customers	$437,500	$430,000
Variable operating cost  (% of net sales)	80%	80%
Bad debt cost (% of net sales)	2.50%	0.00%
Credit evaluation & collection cost (% of net sales)	1.50%	2.15%

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the current and proposed credit policies for Penn Corp we need to calculate the cash flows associated with each policy and discount them to their present valu... View the full answer