Reference no: EM132960087

Questions -

Q1. Champion Corporation has daily cash receipts of $300,000 and is interested in acquiring a lockbox service in order to reduce collection time. The firm received the following lockbox service offers:

Bank A will reduce collection time by 3 days at a cost of $3,000 per month

Bank B will reduce collection time by 4 days at a cost of $5,000 per month

Bank C will reduce collection time by 1 day at a cost of $500 per month

Bank D will reduce collection time by 2 days at a cost of $1,000 per month

If money market rates are expected to average 6% during the year, and the firm wishes to maximize income, which bank should the firm choose?

Q2. Classic Inc's budgeted sales for the coming year are $40,500,000 million of which 80% are expected to be credit sales at terms of n/30. Classic Inc. estimates that a proposes relaxation of credit standards would increase credit sales by 20% and increase the average collection period form 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit standards would result in an expected increase in the average accounts receivable balance of how much?

Q3. TNT Company is evaluating the extension of credit to a new group of customers. Although these customers will provide $240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur $21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment.

a. Should TNT Company extend credit to these customers?

b. Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?