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A company is considering keeping the current credit policy or making a change in the policy.
A company's current policy is 2/10net 30. The price of the products is $25.00 and with the discount is $24.50. Variable costs are $17.50 with or without the discount. Sales are currently 1,540 units and are expected to rise to 1,586 or about 3%. The actual default rate is 1.00% and R* is 1.50%.
How much is the NPV of for leaving the current policy unchanged?
It is considering increasing the discount to 3%. But the price not taking the discount had to remain $25 making the price with the discount lower, $24.25. The variable cost is expected not to change, $17.50. But with the extra discount bad debts are expected to increase from 1.00% to 1.25%. R* is 1/50%. With the 3% discount sales are expected to rise by about 5% from 1,540 to 1,617.
How much is the NPV with the increase in discount rate?
What do you recommend? Keep the existing policy 2% discount or the proposed policy with 3% discount? Why?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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