What additional investment in accounts receivable is needed

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Question - Henderson Office Supply is considering a more liberal credit policy to increase sales but expects that 5 percent of the new accounts will be uncollectible. Collection costs are 2 percent of new sales, production and selling costs are 75 percent, and accounts receivable turnover is two times. Assume income taxes of 30 percent and an increase in sales of $61,000. No other asset buildup will be required to service the new accounts.

Required -

a. What additional investment in accounts receivable is needed to support this sales expansion?

b. What would be Henderson's incremental after tax return on investment?

c. Should Henderson liberalize credit if a 19 percent after-tax return on investment is required?

Reference no: EM133138657

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