Your company currently sells on terms of net 10 on annual sales of $7,000,000. Bad debt expenses are 3% of sales and variable costs total $3,500,000. Of the customers who aren't deadbeats, 30% pay immediately while the balance pay on day 10.
You have proposed changing credit terms to net 20. Sales would probably increase 16% but bad debt would increase to 5% of total sales. 20% of paying customers would pay on day 0 while the balance would pay on day 20. Your firm has an 8% opportunity cost. Find the expected impact of this credit policy change on pre-tax profits.