Problem:
Archer Chemical is thinking about extending trade credit to new customers. Sales would increase by $80,000 if credit were extended to these customers. Of the new accounts receivable related to these sales, 8 percent would be uncollectible. Additional collection costs would be 4 percent of sales, and selling and collection costs would be 80 percent of sales. The firm is in a 30 percent tax bracket.
a. Compute the new income after taxes.
b. What will be the percentage return on the new sales?
c. If accounts receivable are turned over four times a year, what will be the new investment in accounts receivable?
d. What will be the return on investment assuming the only new investment will be in accounts receivable?