Reference no: EM132419115

Problem: Novartis is concerned about its bad-debt losses and the length of time required to collect receivables. Current sales are $43.8 million per year. Bad-debt losses are currently 3.5 percent of sales, and the average collection period is 68 days (credit terms are "net 30"). One plan under consideration is to tighten credit standards by refusing to grant additional credit to any customers who are more than 15 days past due on their payments. This change in credit policy is expected to reduce sales by 10 percent but also reduce bad-debt losses to 1.5 percent of sales and reduce the average collection period to 40 days. The firm's variable cost ratio is 70 percent, and its required pretax rate of return on current assets investments is 18 percent. The company also expects its inventory investment to decrease by $1 million due to the anticipated decrease in sales.

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Question: Determine the net effect of this plan on Novartis' pretax profits. Can you please help me by providing the authentic solution of this problem.