Answer to Question #211809 in Finance for safi

Question #211809

a. Star Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year. Assuming that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent, should the proposed discount be offered? (Note: you are required to perform necessary calculations to support your answer.)

Expert's answer

net benefit under proposed plan

net profit is $128750 so the proposed discount should be offered because there is profit made.

The calculation of the spreadsheet

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