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1. Norton Wrench, a machine tool company, recentlyfound out that-(Answered)

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1.??????Norton Wrench, a machine tool company, recentlyfound out that one of its main competitors has tightened its credit standards.Norton?s chief operating officer has asked you to make a recommendation to theexecutive policy committee on whether the company should tighten its standards.The marketing department estimates that annual sales will drop $20,000 from thepresent level of $275,000. The variable cost ratio is 0.7 and will not change,according to one of the cost accountants. Variable expenses related tocollections and credit administration are projected at 1.25 percent of salesunder the existing standards but 1.45 percent of sales under the proposedstandards. The bad debt expense rate on both existing and incremental (lost)sales is estimated to be 7 percent. The DSO of 56 days is not expected tochange and can be applied to any sales gained or lost due to a change in creditstandards. The company?s annual cost of capital is 15 percent.

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a.??????Draw a cash flow timeline for 1 day?s salesunder existing credit policy

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b.?????What is the value effect (?Z) of this decisionon 1 day?s sales?

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c.??????What is the overall value effect (?NPV)?

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d.?????Are there any nonfinancial considerations aboutwhich you believe the executive policy committee should be warned?

 

Paper#9256175 | Written in 27-Jul-2016

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