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Category > Business & Finance Posted 12 Dec 2017 My Price 10.00

Draw a cash flow timeline for 1 day’s sales

Norton Wrench, a machine tool company, recently found out that one of its main competitors

has tightened its credit standards. Norton’s chief operating officer has asked you to make a

recommendation to the executive policy committee on whether the company should tighten its

standards. The marketing department estimates that annual sales will drop $20,000 from the

present level of $275,000. The variable cost ratio is 0.7 and will not change, according to one of

the cost accountants. Variable expenses related to collections and credit administration are

projected at 1.25 percent of sales under the existing standards but 1.45 percent of sales under

the proposed standards. The bad debt expense rate on both existing and incremental (lost) sales

is estimated to be 7 percent. The DSO of 56 days is not expected to change and can be applied to

any sales gained or lost due to a change in credit standards. The company’s annual cost of capital

is 15 percent.

a. Draw a cash flow timeline for 1 day’s sales under existing credit policy

b. What is the value effect (ΔZ) of this decision on 1 day’s sales?

c. What is the overall value effect (ΔNPV)?

d. Are there any nonfinancial considerations about which you believe the executive policy

committee should be warned?

Answers

CourseLover
(12)
Status NEW Posted 12 Dec 2017 06:12 AM My Price 10.00

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