Until recently, Augean Cleaning Products sold its products on terms of net 64, w

Question

Until recently, Augean Cleaning Products sold its products on terms of net 64, with an average collection period of 79 days. In an attempt to induce customers to pay more promptly, it has changed its terms to 1/10, EOM, net 64. Assume a current sales of 100 and the interest rate is 10%. The initail effect of the changed terms is as follows"

^a Some custoemrs deduct the cash discount even though they pay after the specified date.

a. Calculate the NPV on original terms. (Use 365 days in a year. Round answer 2 decimal places.)

b. Assume that sales volume is unchanged, there are no defaults and cost of goods sold is 84% of sales. Calculate the NPV on changed terms. (use 365 days in a year. round answer 2 decimal places.)

Average Collection Periods, Days Percent of Sales with Cash Discounts Cash Discount Net                             64          34^a 84

Explanation / Answer

a. NPV on orginal terms Current Sales $100 Cost of goods sold = $100 x 80% $80 NPV per $100 sales = -80 + $100/(1+12%)^79/365 days $17.58 b.Calculate the effect of the changed terms. Assume Cost of goods sold = $100 x 80% $80 Sales with 1% Cash Discounts = ($100 - 1) x 64% $63.36 Sales without Cash Discount = $100 x (1- 64%) $36.00 NPV per $100 sales = -80 + $63.36/(1+12%)^30/365 days + $36/(1+12%)^84/365 NPV per $100 sales = -80 + $62.77 + $35.07 $17.85

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