FM -- Problem from Credit Policy

K K (Student) (83 Points)

03 April 2010

Hi All,

This is Illustration # 2 from Credit Policy Chapter from Financial Management Paper.

I have attached the pages from the textbook. In the problem, I didn't understand how to compute the

Marginal increase in investment in receivable less profit margin

Please someone explain it to me.

Thanks,

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Aravind.. (CA) (1262 Points)
Replied 03 April 2010

there is nothing much difficult in this problem...

prepare income statement for all the three policies(proposal1&2, present)

find out the profit in each policy, find out the accounts receivable in each policy.

then find out the incremental profit and accounts receivables for proposal 1 and 2 from the present policy.

now apply the rate of return the company expects on the incremental accounts receivable.

the difference between the resultant figure and the incremental profit for each proposal to be considered to opt the appropriate one.

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