1. Uni Ltd. is considering increasing its credit period from 30 days to 50 days.

The firm expected

sales will increase from Rs100 million to Rs170 million. The bad debt ratio and collections cost
ratio which actually stand at 5% and 6% respectively will remain unchanged. The firm’s variable
cost ratio is 80% and corporate tax rate is 15%. The company after tax return on investment is
15%. Should the company increase its credit period?

2. SunnyTexiles Ltd. is considering introducing a cash discount. The company’s credit terms ‘net
45’, and would like to change to ‘1/15 net 45’. The current average collection period is 50 days
and is expected to decrease to 30 days with the new credit terms. Forty percent of customers
are expected to take advantage of the new terms. The company’s actual sales are Rs6,000,000.
If the company requires a return of 15% on investment, what will be the effect of the discount?
Assume sales volume will be unaffected by the discount.

3. A company with annual sales of Rs120 million allows on average 2 months’ credit to its
customers. It is considering decreasing its credit period so that customers will be paying on
average in one month. This will lead to a 5% decrease in annual sales. At the same time it will
offer a one percent discount for payment in fifteen days and expects this offer to be taken by
thirty percent of the reduced turnover. The firm’s variable cost ratio is 80% (before any
discount) and is not expected to change with the new policy. The company requires a return on
investment of sixteen percent. Should the company introduce the new credit terms?

4. Smile Ltd. has been offered credit terms from its major supplier of 2/10 net 30. If the company
can invest cash to obtain an annual return of 15%, what should the company do?