Question

The new credit manager of Kay's Department store plans to liberalize the firm's credit policy. The firm currently generates credit sales of $575,000 annually. The more lenient credit policy is expected to produce credit sales of $750,000. The bad debt losses on additional sales are projected to be 5% despite an additional$15,000 collection expenditure. The new manager anticipates production and selling costs other than additional bad debt and collection expenses will remain at the 85% level. The firm is in the 34% tax bracket.
a. If the firm maintains its receivables turnover of 10 times, how much will the receivables balance increase?
b. What would be Kay's incremental after-tax return on investment?
c. Assuming additional inventory of $35,000 is required to support the additional sales, compute the after-tax return on investment.

Answer 1

35,0000