Case Analysis: MultiTech Ltd (in Rs Millions)

a b c
Sr. Particilaurs Base Case Credit Std Credit Prd Cash Dsct
Unltd to Ctgry 3&4 From 30 to 60 days 2/10 net 30
1 Sales 800 850 840 820
2 Incremental Sales nil 50 40 20
3 Average Collection Period 20 20 50 16
4 Proportion of Credit Sales 70% 70% 70% 70%
5 % CreditSales on Cash Disc. 50% 50% 20% 70%
6 Cash Discount Term 1% 1% 1% 2%
7 Bad Debt Cost 12% 12% NA NA
8 Contribution Margin 20% 20% 20% 20%
9 Tax Rate (1-t) 60% 60% 60% 60%
10 Post Tax Cost of Capital 12% 12% 12% 12%

STEP ONE: Contribution

Incremental Sales nil 50 40 20
Total Contribution 160 170 168 164
Incremental Contribution 10 8 4

STEP TWO: Cost

Cash Discount Sales 280 298 118 402
Cash Discount Cost 2.80 2.98 1.18 8.04
Incremental Cash Disc. Cost 0.18 -1.62 5.24

Bad Debt Cost 6.00 0.00 0.00

Incrmntl Oprtng Cost 6.18 -1.62 5.24

STEP THREE: Operating Income

Operating Income 3.83 9.62 -1.24
After Tax Oprtng Income (1-Tax Rate 2.30 5.77 -0.74

STEP FOUR: Investments

Total Invstement in Rcvbls 44.44 47.22 116.67 36.44
Incremental Investment 2.78 72.22 -8.00
Cost of Incrmntl Invstmnt 5.33 0.33 8.67 -0.96

STEP FIVE: Residual Income

Residual Income 1.96 -2.89 0.22
Incremental ROI OpInc/ Incrtl 82.6% 8.0% 9.3%
Decision Yes No Yes