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Problem 1. Lewis Enterprise is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year; the average collection period is expected to increase from 45 to 60 days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40 and the variable cost per unit is $31. The firm's required return on equal risk investments is 25%. Should the firm go ahead with its plan to relax credit standards?
Problem 2. A firm is contemplating shortening its credit cycle period from 40 to 30 days and believes that as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses are expected to decrease from 1.5% to 1% of sales. The firm is currently selling 12,000 units but believes that as a result of the proposed change, sales will decline to 10,000 units. The sale price per unit is $56 and the variable cost per unit is $45. The firm has a required return on equal risk investments of 25%. Should the firm go ahead with its plans to shorten its credit period?