1. ABC Inc. currently grants credit terms net 25. It is considering a new policy that involves a more stringent credit policy: net 20. As a result, the price of its product will stay the same at $45. The expected sales will decrease by 2,000 per year to 10,000 units. Variable costs will remain at $37 per unit and bad debt losses can be reduced by $1,000 per year to $2,000. ABC Inc. will finance the additional investment in receivables using its line of credit, which charges 6.5 percent interest after tax, and its tax rate is 40 percent. Should ABC Inc. switch to the new policy?
2.Calculate the effective annual cost of a one-year $1,000,000 operating line of credit. The firm borrowed 600,000 for the first 5 months of the year and reduced the loan amount to $500,000 for the rest of the year. The quoted interest rate is 7.5 percent and there is a 0.8 percent commitment fee on the unused portion.