Calculate the decision change in value

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Reference no: EM132211008

Question - Besley Inc. is trying to decide whether to offer a 3% cash discount for payments made within 10 days, making its new term 3/10, net 30. On average, its customers currently pay in 40 days under its present terms of net 30. A sales analyst estimates that sales will stay the same. The existing bad debt loss rate is 3% and will not change. It is estimated that 40% of customers will take the discount and pay on the 10th day under the new term. The remaining customers will continue to pay in 40 days, on average. The company's annual cost of capital is 10% Annual sales will remain unchanged at $250 million, and the variable cost ratio will continue to be 60%. The variable expenses for credit administration and collections will drop from 2% to 1% if the cash discount is implemented.

a. Calculate the decision's 1-day change in value.

b. Calculate the decision's NPV.

c. Do you recommend that Besley Inc. initiate the cash discount?

Reference no: EM132211008

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