Webb Inc. currently makes all sales on credit and offers no cash discounts. The firm is considering offering a 2 percent cash discount for payments within 10 days. The firm's current average collection period is 65 days, sales are 400,000 units, selling price is $50 per unit, and variable cost per unit is $40.
The firm expects that the changes in credit terms will result in an increase in sales to 410,000 units, that 75 percent of the sales will take the discount, and that the average collection period will fall to 45 days.
Bad debts are expected to drop from 1.0 to 0.9 percent of sales.
If the firm's required rate of return on equal-risk investments is 25 percent, assuming a 365-day year, should the firm offer the proposed discount?