Until recently, Augean Cleaning Products sold its products on terms of net 64, w
ID: 2771949 • Letter: U
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 initial effect of the changed terms is as follows"
Average Collection Periods, Days
Percent of Sales with Cash Discounts
Cash Discount
Net
64
34^a
84
^a Some customers 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.)
Net present value
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.)
Net present value
Average Collection Periods, Days
Percent of Sales with Cash Discounts
Cash Discount
Net
64
34^a
84
Explanation / Answer
Solution.
NPV = Nominal value / (1 + interest rate/100 * days/daily basis)
NPV on original terms
= 100 / (1+ 10% /100 * 79)
= 100 / 8.69
= 11.50
2. Calculate the NPV on changed terms.
= 100 / (1+ 10% /100 * 10)
= 100 / 1.1
= 90.90
1/10 Net 30 Take 1% discount if pay in 10 days, otherwise pay in 30 days 18.2%Related Questions
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