"20. Apollo Data Systems is considering a promotional campaign that will increase annualcredit sales by $600,000. The company will require investments in accounts receivable,inventory, and plant and equipment. The turnover for each is as follows:Accounts receivable .................................... 5xInventory ..................................................... 8xPlant and equipment .................................... 2xAll $600,000 of the sales will be collectible. However, collection costs will be 3 percent ofsales, and production and selling costs will be 77 percent of sales. The cost to carryinventory will be 6 percent of inventory. Depreciation expense on plant and equipment willbe 7 percent of plant and equipment. The tax rate is 30 percent. a. Compute the investments in accounts receivable, inventory, and plant and equipmentbased on the turnover ratios. Add the three together. b. Compute the accounts receivable collection costs and production and selling costsand add the two figures together. c. Compute the costs of carrying inventory. d. Compute the depreciation expense on new plant and equipment. e. Add together all the costs in parts b, c, and d. f. Subtract the answer from part e from the sales figure of $600,000 to arrive at incomebefore taxes. Subtract taxes at a rate of 30 percent to arrive at income after taxes. g. Divide the aftertax return figure in part f by the total investment figure in part a. If thefirm has a required return on investment of 12 percent, should it undertake thepromotional campaign described throughout this problem.7-20. Solution:Apollo Data Systemsa. Accounts receivable = sales/accounts receivable turnover $120,000 = $600,000/5Inventory = sales/inventory turnover $75,000 = $600,000/8Plant and equipment = sales/(plant and equipment turnover)$300,000 = $600,000/ 2$495,000 Total investment S7-21 7-20. (Continued)b. Collection cost = 3% × $600,000 $18,000Production and selling costs = 77% × $600,000 =462,000Total costs related to accounts receivable $480,000c. Cost of carrying inventory6% × inventory6% × $75,000 $4,500d. Depreciation expense7% × Plant and Equipment7% × $300,000 $21,000e. Total costs related to accounts receivable $480,000Cost of carrying inventory 4,500Depreciation expense 21,000Total costs $505,500f. Sales $600,000– total costs 505,500Income before taxes 94,500Taxes (30%)28,350Income after taxes $ 66,150Income after taxes $66,150 g. = =13.36%Total investment 495,000 Yes, it should undertake the campaignThe aftertax return of 13.36% exceeds the required rate ofreturn of 12%S7-22 21. In Problem 20, if inventory turnover had only been 4 times: a. What would be the new value for inventory investment? b. What would be the return on investment? You need to recompute the total investmentand the total costs of the campaign to work toward computing income after taxes.Should the campaign be undertaken?7-21. Solution:Apollo Data Systems (Continued)a. Inventory = sales/inventory turnover$150,000 = $600,000/4b.New Total InvestmentAccounts receivable $120,000Inventory 150,000Plant and equipment300,000 $570,000Total Cost of the CampaignCost of carrying inventory6% × $150,000 = $9,000($4,500 more than previously)New Income After TaxesSales $600,000– total costs 510,000 ($505,500 + 4,500)Income before taxes 90,000Taxes (30%)27,000Income after taxes $ 63,000Income after taxes $63,000 = = 11.05% Total investment 570,000 No, the campaign should not be undertakenThe aftertax return of 11.05% is less than the required rate ofreturn of 12%S7-23 (Problems 22–25 are a series and should be taken in order.)22. Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30 days,which is also the average collection period. Maddox does not offer a discount for earlypayment, so its customers take the full 30 days to pay.What is the average receivables balance? What is the receivables turnover?7-22. Solution:Maddox ResourcesSales/360 days = average daily sales$180,000/360 = $500Accounts receivable balance = $500 × 30 days = $15,000Sales $180,000 Receivable turnover = = =12xReceivables $15,000 or360 days/30 = 12x23. If Maddox were to offer a 2 percent discount for payment in 10 days and every customertook advantage of the new terms, what would the new average receivables balance be?Use the full sales of $180,000 for your calculation of receivables.7-23. Solution:Maddox Resources (Continued)$500 × 10 days = $5,000 new receivable balanceS7-24 24. If Maddox reduces its bank loans, which cost 12 percent, by the cash generated from itsreduced receivables, what will be the net gain or loss to the firm?7-24. Solution:Maddox Resources (Continued)Old receivables – new receivables with discount = Funds freed bydiscount$15,000–$5,000 ................................... =$10,000Savings on loan = 12% × $10,000 .......... =$1,200Discount on sales = 2% × $180,000 ........ = (3,600)Net change in income from discount ...... $(2,400)No! Don’t offer the discount since the income from reduced bankloans does not offset the loss on the discount.25. Assume that the new trade terms of 2/10, net 30 will increase sales by 20 percent becausethe discount makes the Maddox price competitive. If Maddox earns 16 percent on salesbefore discounts, should it offer the discount? (Consider the same variables as you did forproblems 22 through 24.)7-25. Solution:Maddox Resources (Continued)New sales = $180,000 × 1.20 = $216,000Sales per day = $216,000/360 =$600Average receivables balance = $600 × 10 = $6,000Savings in interest cost ($15,000 – $6,000) × 12% = 1,080Increase profit on new sales = 16% × $36,000* = $5,760Reduced profit because of discount = 2% × $216,000 =(4,320)Net change in income ............................................$2,520Yes, offer the discount because total profit increases.*New Sales $36,000 = $216,000 – $180,000S7-25 "