Solved – The Acme Aglet Corporation has a 12% opportunity cost of funds and currently sells on terms of “net 10, EOM”

Question

The Acme Aglet Corporation has a 12% opportunity cost of funds and currently sells on terms of “net 10, EOM”. (This means that goods shipped before the end of the month must be paid for by the tenth of the following month). The firm has sales of $10 Million a year, which is 80% on credit and spread evenly over the year. The average collection period is currently 60 days. If Acme offered terms of “2/10, net 30,” 60% of its credit customers would take the discount, and the average collection period would be reduced to 40 days. Should Acme change its term from “net 10, EOM” to “2/10, net 30”? Why?

Answer

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