Jenkins Supply Corporation sells $120 million of its products to wholesalers on terms of "net 50." Currently, the firm's average collection period is 65 days. In order to speed up the collection of receivables, Jenkins is considering offering a 1 percent cash discount if customers pay their bills within 15 days.
The firm expects 40 percent of its customers to take the discount and its average collection period to decline to 40 days. The firm's required pretax return on receivables investments is 20 percent.
Determine the net effect on Jenkins' pretax profits of offering a 1 percent cash discount.