Gardner Company currently makes all sales on credit and offers no cash
discount. The firm is considering offering a 2% cash discount for
payment within 15 days. The firm’s current average collection period is
60 days, sales are 40,000 units, selling price is $45 per unit, and
variable cost per unit is $36. The firm expects that the change in
credit terms will result in an increase in sales to 42,000 units, that
70% of the sales will take the discount, and that the average collection
period will fall to 30 days. If the firm’s required rate of return on
equal-risk investments is 25%, should the proposed discount be offered?
(Note: Assume a 365-day year.)
Click here for the solution: Gardner Company currently makes all sales on credit and offers no cash discount
