Fast Turnstiles Co. is evaluating the extension of credit to a
new group of customers. Although these customers will provide
$180,000 in additional credit sales, 12 percent are likely to be
uncollectible. The company will also incur $16,200 in additional
collection expense. Production and marketing costs represent 72
percent of sales. The firm is in a 34 percent tax bracket and has a
receivables turnover of four times. No other asset buildup will be
required to service the new customers. The firm has a 10 percent
desired return.

Incremental income after taxes is $8,316

The return on incremental investment is 18.48%

The incremental income after taxes if 15 percent of the new sales prove to be uncollectible is $4,752

Questions:

1. What is the percent of return on incremental investment if 15 percent of the new sales prove to be uncollectible? = %

2. What is the percent of return on incremental investment if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible? = %

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