Use the information provided below to answer the following questions: Redfern Traders is considering extending credit to
Posted: Wed Jul 06, 2022 6:28 pm
Use the information provided below to answer the followingquestions:
Redfern Traders is considering extending credit to customers inanother district. Sales are expected to increase byR600 000 if credit is granted to these customers. From the newaccounts receivable generated, 15% is expected tobe uncollectible. Additional collection costs are forecast at 8% ofsales. The goods are expected to be sold at costplus 50%. The firm is in the 30% tax bracket.
1. Calculate the after-tax profit on the new sales.
2. Suppose the only new investment in this case is the build-upin accounts receivable and that the turnover ratio is 5:1 betweensales and accounts receivable. If the minimum required after-taxreturn is 15%, is this an acceptable investment? Motivate youranswer.
Redfern Traders is considering extending credit to customers inanother district. Sales are expected to increase byR600 000 if credit is granted to these customers. From the newaccounts receivable generated, 15% is expected tobe uncollectible. Additional collection costs are forecast at 8% ofsales. The goods are expected to be sold at costplus 50%. The firm is in the 30% tax bracket.
1. Calculate the after-tax profit on the new sales.
2. Suppose the only new investment in this case is the build-upin accounts receivable and that the turnover ratio is 5:1 betweensales and accounts receivable. If the minimum required after-taxreturn is 15%, is this an acceptable investment? Motivate youranswer.