Reference no: EM132808029

A firm that is not offering a cash discount is now considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is P25,000 per film, variable cost per film is P18,000 per film, and the average cost per film is P21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 80 percent of the sales will take the discount, and the average collection period will drop to 30 days, 360 days in a year. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales.

Problem 1: The firm's required return on equal-risk investments is 20 percent. What is the cost of marginal investment in accounts receivable under the proposed plan? What is the net result of increasing the cash discount?