Question: Archer Chemical is thinking about extending trade credit to new customers. Sales would increase by $80,000 if credit were extended to these customers. Of the new accounts receivable related to these sales, 8 percent would be uncollectible. Additional collection costs would be 4 percent of sales, and selling and collection costs would be 80 percent of sales. The firm is in a 30 percent tax bracket.

a. Compute the new income after taxes.

b. What will be the percentage return on the new sales?

c. If accounts receivable are turned over four times a year, what will be the new investment in accounts receivable?

d. What will be the return on investment assuming the only new investment will be in accounts receivable?

Basic Problems

1. Beth's Society Clothiers, Inc., has collection centers across the country to speed up collections. The company also makes payments from remote disbursement centers so the firm's checks will take longer to clear the bank. Collection time has been reduced by two and one-half days and disbursement time increased by one and one-half days because of these policies. Excess funds are being invested in short-term instruments yielding 6 percent per annum.

a. If the firm has $4 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?

b. How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash? Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by one and one-half days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without offending suppliers. The bank has a remote disbursement center in Florida.

a. If Neon Light Company has $2 million per day in collections and $1 million per day in disbursements, how many dollars will the cash management system free up?

b. If Neon Light Company can earn 9 percent per annum on freed-up funds, how much will the income be?

c. If the total cost of the new system is $375,000, should it be implemented?