Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $540,000 in additional credit sales, 15 percent are likely to be uncollectible. The company will also incur $18,100 in additional collection expenses. Production and marketing costs represent 72 percent of sales. The firm is in a 30 percent tax bracket and has a receivables turnover of five times. No other asset buildup will be required to service the new customers. The firm has a 12 percent desired return.
a. Calculate the incremental income after taxes.
b. Calculate the return on incremental investment.
c. Should Fast Turnstiles Co. extend credit to these customers?
d. Calculate the incremental income after taxes if 18 percent of the new sales prove to be uncollectible.