The company is experiencing cash flow problems and is considering a change in credit terms which should increase sales and ultimately improve cash flows. In order to implement it successfully, they are considering extending a discount to debtors on the basis 5/30 net 60. Debtors currently take 45 days on average to pay their accounts and current annual credit sales are R2 350 000. It is anticipated that 40% of current debtors will take advantage of the discount.

The company expects sales to increase by R550 000 due to new sales to customers. New sales will result in 60% of the customers taking the discount and the balance will pay in 70 days. Inventory will increase by R120 000 and creditors and accrual expenses will increase by R45 000. Increased sales will lead to a total of R22 000 bad debts.ECI's profit margin is 20% and WACC is 10%.

I am required to calculate the annual cash flow benefit of changing the credit policy. (Ignoring tax)

How would I go about calculating the annual cash flow benefit?

Answer rating: 100% (QA)

To calculate the annual cash flow benefit of changing the credit terms 1 Calculate current credit sa... View the full answer