What approximate value should a firm put on being able to permanently reduce the length of its collection period by one day if annual sales (all on credit) are $5,000,000 and the appropriate opportunity cost is 10 percent annually?

Question

Quizplus · Accepted Answer

To calculate the value of reducing the collection period by one day, we need to use the formula:

Value = (1 - (1 + i)^-n) / i x (Annual Sales / 365)

Where i is the opportunity cost rate and n is the number of days reduced in the collection period.

In this case, i = 10%, n = 1, and Annual Sales = $5,000,000.

Plugging these values into the formula, we get:

Value = (1 - (1 + 0.1)^-1) / 0.1 x (5,000,000 / 365)
Value = $13,698.63

Therefore, the approximate value of permanently reducing the collection period by one day is $13,700.

The closest answer choice is C.

What Approximate Value Should a Firm Put on Being Able