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Determine the loss of after-tax annual cash flows

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Mustafa Inc. is considering adopting a new credit policy of 3/10 net 30 instead of net 30 days. The firm estimates that 30 percent of the customers will take advantage of the discount, while the remaining 70 percent will pay on day 30. The after-tax discount rate is 5% and the tax rate is 40%. Assuming the policy change results in a reduction in Account receivables of 12,575 and a loss of after-tax annual cash flows of 4131, should the firm change it credit policy?

Reference no: EM133114715

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