Blueroot Inc.is considering a change in its financing policy.Currently, it uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time.The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11, 760 per day, using a 365-day year.The interest rate on the notes payable is 10%, and the tax rate is 40%.If the firm implements the plan, what is the expected change in net income?

Question

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A/PN? d?sc.= Net purchases/day ×Actual days to payment
A/PN? d?sc.= $11, 760 ×30 = $352, 800
A/PD?sc.= Net purchases/day ×Discount days
A/PD?sc.= $11, 760 ×10 = $117, 600
Amount needed to be financed = A/PN? d?sc.- A/PD?sc.Amount needed to be financed = $352, 800 - $117, 600 = $235, 200
Additional interest cost = Amount needed to be financed ×Annual interest rate
Additional interest cost = $235, 200 ×10.00% = $23, 520
Gross purchases = (Net purchases/day ×365)/(1 - Disc.%)
Gross purchases = $11, 760 ×365/98.00% = $4, 380, 000
Discounts lost = Gross purchases ×Discount %
Discounts lost = $4, 380, 000 ×2.00% = $87, 600
Pre-tax savings = Discounts lost - Additional interest
Pre-tax savings = $87, 600 - $23, 520 = $64, 080
After-tax savings = Pre-tax savings ×(1 - T)
After-tax savings = $64, 080 ×60.00% = $38, 448