Please help!!! Whiplash Inc. sells $73,000,000 of products to retailers on credi
ID: 2800216 • Letter: P
Question
Please help!!!
Whiplash Inc. sells $73,000,000 of products to retailers on credit terms of “net 30”, and its ACP is 55 days. To speed up collection of A/R, the firm is considering changing credit terms to “2/10 net 30”. Whiplash expects 40% of its customers to take the discount and for its ACP to decline to 35 days. If the firms required return on A/R is 15%, should they offer the discount?
Question options:
1) No, the net expected benefit is ($3,599)
2) No, the net expected benefit is ($294)
3) Yes, the net expected benefit is $28,000
4) Yes, the net expected benefit is $16,000
Explanation / Answer
Cost to Company: Discount = 73,000,000 x 40% x 2% = 584,000
Savings to company {due to decrease in Average Credit Period (ACP)}:
20 days interest cost (55days-35 days) = 73,000,000 x 20/365 x 15% = $600,000
net expected benefit is $16,000
Option 4 is correct.
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