Competitive Mesh Shirts Is Considering a Plan to Ease Its

question 56

Multiple Choice

Competitive Mesh Shirts is considering a plan to ease its credit terms in order to generate greater revenues. Last year, Competitive had sales of 1,000,000 units at a price and variable cost of $20 and $15, respectively. Its current average collection period is 20 days and its percentage of bad debt expense is 2% while it required return on investment is 10%. If Competitive were to ease its credit terms, the firm anticipates that its sales would increase to 1,200,000 units without a change in price or variable costs. However, the average collection period is expected to increase to 30 days and bad debt expense is expected to increase to 3%.
-What will be Competitive's cost of marginal investment in accounts receivable?

• A) $1,479,452.84
• B) $821,917.81
• C) $65,753.50
• D) There is not enough information given

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Definitions:

Net Annual Operating

Typically refers to the net operating income or profit generated by a business over the course of a year, excluding non-operating revenues and expenses.

After-Tax Discount Rate

The rate used to discount future cash flows of an investment after taxes have been accounted for, reflecting the investor's required rate of return net of taxes.

Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term liquidity.

Straight-Line Depreciation

This method evenly allocates the cost of an asset over its useful life.