The incremental investment in receivables under the accounts receivable approach is equal to:
A)P - vQ′.
B)PQ′.
C)PQ + v(Q′ - Q).
D)P(Q′ - Q).
E)PQ(Q′ - Q).

Question

Quizplus · Accepted Answer

The incremental investment in receivables under the accounts receivable approach is equal to the change in the level of receivables multiplied by the cost of carrying the receivables. The change in the level of receivables is equal to the difference between the new level of receivables (PQ′) and the old level of receivables (PQ). The cost of carrying the receivables is equal to the interest rate (v) multiplied by the average level of receivables. The average level of receivables is equal to the average of the new and old levels of receivables, which is (PQ′ + PQ)/2. Therefore, the incremental investment in receivables is equal to v(PQ′ + PQ)/2.

The Incremental Investment in Receivables Under the Accounts Receivable Approach