Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $324,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $17,000 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 35 percent tax bracket. No other asset buildup will be required to service the new customers. The firm has a desired return of 8 percent. Assume the average collection period is 180 days.
a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.)
b. Should credit be extended to the new group of customers?