Initiating a cash discount
Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 22 % cash discount for payment within 15 days. The firm's current average collection period is 60 days, sales are 40,000 units, the selling price is $45 per unit, and variable cost per unit is $36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70 % of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm's required rate of return on equal-risk investments is 25 %, should the proposed discount be offered? (Note: Assume a 365-day year.)