Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return.
Incremental income after taxes is $8,316
The return on incremental investment is 18.48%
The incremental income after taxes if 15 percent of the new sales prove to be uncollectible is $4,752
Questions:
1. What is the percent of return on incremental investment if 15 percent of the new sales prove to be uncollectible? = %
2. What is the percent of return on incremental investment if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible? = %