Proposal #1 would extend trade credit to some customers that previously have been denied credit beca

Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks. Sales are projected to increase by $150,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 9% are projected to be uncollectible. Additional collection costs are projected to be 3% of incremental sales (whether they actually end up collected or not), and production and selling costs are projected to be 77% of sales. Your firm expects to pay a total of 40% of its income after expenses in taxes.BUSI 320 Comprehensive Problem 2 Spring D 2016You have been asked to assess the expected financial impact of each of the following proposals toimprove the profitability of credit sales made by your company. Each proposal is independent of theother. Answer all questions. Showing your work may earn you partial credit.Proposal #1 would extend trade credit to some customers that previously have been denied creditbecause they were considered poor risks. Sales are projected to increase by $150,000 per year ifcredit is extended to these new customers. Of the new accounts receivable generated, 9% areprojected to be uncollectible. Additional collection costs are projected to be 3% of incremental sales(whether they actually end up collected or not), and production and selling costs are projected to be77% of sales. Your firm expects to pay a total of 40% of its income after expenses in taxes.1) Compute the incremental income after taxes that would result from these projections:2) Compute the incremental Return on Sales if these new credit customers are accepted:If the receivable turnover ratio is expected to be 2.5 to 1 and no other asset buildup is neededto serve the new customers…3) Compute the additional investment in Accounts Receivable4) Compute the incremental Return on New Investment5) If your company requires a 18% Rate of Return on Investment for all proposals, do thenumbers suggest that trade credit should be extended to these new customers? Explain.Proposal #2 would establish local collection centers throughout the region to decrease the time ittakes to convert credit payments that are mailed in by check to cash. It is estimated that establishingthese collection centers would reduce the average collection time by 3 days.1) If the company currently averages $30,000 in collections per day, how many dollars will thissuggested cash management system frees up?2) If all freed up dollars would be used to pay down debt that has an interest rate of 6%, howmuch money could be saved each year in interest expense?3) Do the numbers suggest that this new system should be implemented if its total annualcost is $4800? Explain.

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