If the firm has a required rate of return on equal-risk investments of 14%, what recommendation would you give the firm?

Regency Rug Repair Company is trying to decide whether

 

it should relax its credit standards. The firm repairs 72,000 rugs per year at an average

price of $32 each. Bad-debt expenses are 1% of sales, the average collection period

is 40 days, and the variable cost per unit is $28. Regency expects that if it does

relax its credit standards, the average collection period will increase to 48 days and

that bad debts will increase to 11/2% of sales. Sales will increase by 4,000 repairs per

year. If the firm has a required rate of return on equal-risk investments of 14%,

what recommendation would you give the firm? Use your analysis to justify your

answer. (Note: Use a 365-day year.)

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