CURRENT SITUATION FOR DYL PICKLE COMPANY:

So = Current sales = $15 million.

V = Variable costs as a % of sales = 70% = 0.7.

1 - V = Contribution margin = 30% = 0.3.

k = Cost of capital invested in receivables = 15% = 0.15.

ACPo = Average collection period = 30 days. (Note: the credit period is 25 days, i.e., net 25.)

Bo = Bad debt loss percentage = 3% = 0.03.

Do = Discount percentage = 0%.

DYL Homework:

Toughen up on collection policy. New ACP will be 25 days. DS = -$1 million. Bo will go from 3% to 1%.

1. What is the change in Investment? (Enter your answer as a whole number)

2. What is the change in profits? (Enter your answer as a whole number)

3. What is the NPV of the proposed change? (Enter your answer as a whole number)

4. Should the change be made?