Problem:
Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to expand its sales to car-telephone manufacturers. While the firm expects an extra $2 million in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. In addition, collection costs will be 2% on all new sales and the firm's production and selling costs are 80% of sales. Mountain Home's tax rate is 30%.
Q1. Calculate Mountain Home's additional net income.
Q2. If Mountain Home can turn its receivables over 4 times per year, what will its additional investment in accounts receivable be and what will the firm earn as an after-tax return on that investment?
Q3. Mountain Home management requires that any new project earn a minimum of 15% return on investment. Should the firm enter the car-telephone manufacturer market?