We expect that we can receive annual incremental income after taxes of $25,000 which includes an adjustment for uncollectible accounts. What is the maximum commitment to A/R we should be willing to assume if our firm's minimum required after-tax return is 8%?

Question

Quizplus · Accepted Answer

The maximum commitment to A/R can be calculated using the following formula:

Maximum A/R = Incremental Income / Required Return

Therefore, Maximum A/R = $25,000 / 0.08 = $312,500

So, we should be willing to assume a maximum commitment to A/R of $312,500. Option B is the only answer that matches this calculation.

We Expect That We Can Receive Annual Incremental Income After