Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $600,000. The company has a40% cost of goods sold and will require Investments in accounts receivable, Inventory, and plant and equipment. The turnover for eachis as follows:Accounts receivableInventoryPlant and equipmentAll $600,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs willbe 77 percent of sales. The cost to carry Inventory will be 6 percent of Inventory. Amortization expense on plant and equipment will be7 percent of plant and equipment. The tax rate is 30 percent. Inventory is calculated using cost of goods sold and not sales.a. Compute the investments in accounts receivable, Inventory, and plant and equipment based on the turnover ratios. What is the totalvalue of the Investment made?Accounts receivableInventoryPlant and equipmentTotal InvestmentCollection costProduction and selling costs5x8x2x. Compute the accounts receivable collection costs and production and selling costs and add the two figures together.f. Compute Income after taxes.Income after taxes $$Total costs related to accounts receivable$O YesO Noc. Compute the costs of carrying Inventory.Cost of carrying Inventory $d. Compute the amortization expense on new plant and equipment.Amortization expense $e. Add together all the costs in parts b, c, and d.Total cost$g. If the firm has required return on Investment of 12 percent, should it undertake the promotional campaign described throughout thisproblem?$O YesO NoProblem 7-27In the previous problem, if Inventory had only been 2 times:a.What would be the new value for Inventory Investment?Inventory Investment $b.1 What would be the return on Investment? You need to recompute the total Investment and the total costs of the campaign to worktoward computing Income after taxes. (Round the final answer to 1 decimal place.)Rate of return%b.2 Should the campaign be undertaken?

1. Accounts receivable = Sales/Accounts receivable turnoverAccounts receivable = $600,000/5 = $…

Answered: Apollo Data Systems is considering a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 10P

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