QUESTION 4 The incremental net cash flows are shown in the table below. Inflows are shown as a plus outflows as a minu End of Incremental nin. Switch from cash Admin. costs of Total month sales revenue collection costs to credit sales switched sales and unit costsofincremental sales -15000* 15000+ 150 12375* 100 14850++ 27065 1750 -150 1600 Cost of new sa les ** 500 sold at $25 each less 1% discount =1000×$15 099)(500×$25) s15000 =$l2375 Lost cash sales ++600 sold at $25 each less 1%discount =(0.99)(600×$25) s15000 14850 Therefore NPVS27065$9900,S1600 30400 5(.01)1.015 =$26665.0$9609.55$1530.1-30400 =$7404.68 Jumbo Ltd should adopt the proposed cred it arrangements as the NPv of the proposal is ositiveAugust 2003 QUESTION 4 The incremental net cash flows are shown in the table below. Inflows are shown as a plus, outflows as a minus. End of month Incremental sales revenue and unit costs ($) Admin. & collection costs of incremental sales ($) Switch from cash to credit sales ($) Admin. costs of switched sales ($) Total (S) 0 -15 000* -250 -15 000+ -150 -30 400 1 12 375** -100 14 850++ -60 27 065 2 10 000 -100 9 900 3 1 750 -150 1 600 * Cost of new sales ** 500 sold at $25 each less 1% discount = 1 000 × $15 = (0.99) (500 × $25) = $15 000 = $12 375 + Lost cash sales ++ 600 sold at $25 each less 1% discount = 600 × $25 = (0.99) (600 × $25) = $15 000 = $14 850 Therefore: ( ) $ 74 0 4 .6 8 $266 6 5 .0 2 $ 96 0 9 .5 5 $ 15 3 0 .1 1- $30400 - $30400 1 .0 1 5 $ 1600 1 .0 1 5 $ 9900 1 .0 1 5 $27065 NP V 2 3 = = + + = + + Jumbo Ltd should adopt the proposed credit arrangements as the NPV of the proposal is positive