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How much can the firm gain

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Question - Rwathia Construction Supply Company is suffering from a prolonged decline in new construction in its sale area - Mt. Kenya Region. In an attempt to improve its cash position, the firm is considering changes in its accounts - payable policy. After a careful study, it has determined to slowdown disbursement. Purchases for the coming year are expected to be sh. 375 Million. Sale will be sh. 650 Million, which represents about a 20% drop from the current year. Currently, Rwathia discounts approximately 25% of its payment at 3%, 10 days, net 30, and the balance of account paid in 30 days.

Required -

(i) If Rwathia adopts a policy of payment in 45 days as or 60 days how much can the firm gain if the annual opportunity cost of investment is 12%?

(ii) What will be the result if this action causes Rwathia Construction Suppliers to increase their prices to the company by 0.5% to compensate for the 60 day extended term of payment?

Reference no: EM132611055

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