Boswell’s Greenhouse is considering a promotional campaign, if successful, that would increase annual credit sales by $700,000.

Published by admin at October 12, 2023

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Boswell’s Greenhouse is considering a promotional campaign, if successful, that would increase annual credit sales by $700,000. To accomplish that, Boswell will have to invest in accounts receivable, inventory, and plant and equipment. The turnover in each of those areas is 6x, 6x, and 2x, respectively. All $700,000 in additional sales will be collectible—but at an expense of 3% of sales. Production and selling costs will be 75% of sales. The cost to carry inventory will be 5% of inventory. Depreciation expense will be 5% of plant and equipment. The tax rate is 25%. Find: (1) total investment in accounts receivable, inventory, and plant and equipment based on the turnover ratios, then add the three figures together; (2) compute accounts receivable collection costs and production and selling costs and add them together; (3) compute the costs of carrying inventory; (4) compute the depreciation expense on the plant and equipment; (5) add all the costs in (2), (3), and (4) together; (6) Subtract the answer in (5) from the sales figure of $700,000 to arrive at income before taxes. Subtract taxes at 25% to arrive at income after taxes; (7) divided after tax income by the total investment in (1). Should the firm undertake the promotional campaign described here if the required rate of return is 12%? Explain your answer.