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  • Fin200 Week 6 CKPT

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    kaylasgram
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    This document analyzes the potential return on investment of extending more liberal credit terms for a company. It calculates that additional annual sales of $80,000 would result in an incremental income after taxes of $4,480, yielding a 28% return on the $16,000 investment in additional accounts receivable. However, when also considering the required $20,000 investment in inventory, the total return on incremental investment is only 12.44%, which is below the required 15% return. Therefore, the conclusion is that the company should not extend more liberal credit terms.

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    Fin200 Week 6 CkPt

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    This document analyzes the potential return on investment of extending more liberal credit terms for a company. It calculates that additional annual sales of $80,000 would result in an incremental income after taxes of $4,480, yielding a 28% return on the $16,000 investment in additional accounts receivable. However, when also considering the required $20,000 investment in inventory, the total return on incremental investment is only 12.44%, which is below the required 15% return. Therefore, the conclusion is that the company should not extend more liberal credit terms.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    157 views1 page

    Fin200 Week 6 CKPT

    Uploaded by

    kaylasgram
    This document analyzes the potential return on investment of extending more liberal credit terms for a company. It calculates that additional annual sales of $80,000 would result in an incremental income after taxes of $4,480, yielding a 28% return on the $16,000 investment in additional accounts receivable. However, when also considering the required $20,000 investment in inventory, the total return on incremental investment is only 12.44%, which is below the required 15% return. Therefore, the conclusion is that the company should not extend more liberal credit terms.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
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    of 1

    Fin200 Week 6 Checkpoint

    A Investment in accounts receivable 16,000.00 (80,000/5)

    B Added sales 80000


    Accounts uncollectible (9% of new sales) $7,200
    Annual incremental revenue 72800
    Collection costs (5% of new sales) $4,000
    Production and selling costs (78% of new sales) $62,400
    Annual income before taxes $6,400
    Taxes (30%) $1,920
    Incremental income after taxes $4,480
    Return on incremental investment 28%

    C Yes, they should because the 28% is greater than


    the required return of 15%

    D Investment in inventory $20,000 (80,000/4)

    Total incremental investment

    Inventory $20,000
    Accounts Receivable $16,000
    Incremental Investment $36,000
    Return on Investment 12.44%

    E No, they should not extend more liberal credit


    terms because 12.44% is lower than the required
    return of 15%.

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