If the firm’s required rate of return on equal-risk investments is 25%, should the proposed discount be offered?

Gardner Company currently makes all sales on credit and

offers no cash discount. The firm is considering offering a 2% cash discount for payment

within 15 days. The firm’s current average collection period is 60 days, sales are

40,000 units, selling price is $45 per unit, and variable cost per unit is $36. The firm

expects that the change in credit terms will result in an increase in sales to 42,000

units, that 70% of the sales will take the discount, and that the average collection period

will fall to 30 days. If the firm’s required rate of return on equal-risk investments

is 25%, should the proposed discount be offered? (Note: Assume a 365-day year.)

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