Receivables management question
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The company is considering two different approaches to receivables management:
Method 1: Period of credit allowed – days of receivables 10
Yearly revenue estimate 7 000
Method 2: Period of credit allowed – days of receivables 20
Yearly revenue estimate 15 000
In both cases the company’s gross margin is expected at 12%, and the cost of debt necessary to finance receivables is 13%.
What’s the difference (in terms of profit before tax) between the two choices?