What is the expected change in the annual

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Worldwide widgets (WW) has annual credit sales of $13,140,000 on terms of net/30. A proposal to offer terms of 2/10, n/30 is being considered. The proposed discount is expected to increase sales by 1% over the current level. Currently the average collection period (ACP) is 36.2 days. The change in policy is expected to result in 65% of customers taking the discount (paying in 10 days), and the remainder paying in an average of 38 days. WW has a cost of capital of 10.8%.

a) What is the expected change in the annual pre-tax cost of investment in receivables? [Ignore all other costs and benefits associated with the change in credit policy]

b) What is the expected change in WW's annual bad debt losses if bad debt losses decrease from 2.25% to 1.85% of total credit sales? [Ignore your answer to part (a) and all other costs]

c) What is the discount itself expected to cost WW (in $)?

Reference no: EM132691178

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