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Multi Tech Case Analysis

MultiTech Ltd is analyzing three potential changes to its credit and collections policies: 1) Unlimited credit for key customers, 2) Extending the credit period from 30 to 60 days, and 3) Offering a 2% cash discount for payments within 10 days. The base case sees sales of Rs. 800 million with a 20 day average collection period and 50% of sales on credit. Scenario 1 increases sales to Rs. 850 million but sees no change to contributions. Scenario 2 reduces sales slightly to Rs. 840 million but extends the collection period. Scenario 3 further reduces sales to Rs. 820 million but offers a cash discount. The analysis calculates contributions, costs, operating income, investment in

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Rit8
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995 views

Multi Tech Case Analysis

MultiTech Ltd is analyzing three potential changes to its credit and collections policies: 1) Unlimited credit for key customers, 2) Extending the credit period from 30 to 60 days, and 3) Offering a 2% cash discount for payments within 10 days. The base case sees sales of Rs. 800 million with a 20 day average collection period and 50% of sales on credit. Scenario 1 increases sales to Rs. 850 million but sees no change to contributions. Scenario 2 reduces sales slightly to Rs. 840 million but extends the collection period. Scenario 3 further reduces sales to Rs. 820 million but offers a cash discount. The analysis calculates contributions, costs, operating income, investment in

Uploaded by

Rit8
Copyright
© © All Rights Reserved
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Case Analysis: MultiTech Ltd

Sr.
1
2
3
4
5
6
7
8
9
10

Particilaurs

Base Case

Sales
Incremental Sales
Average Collection Period
Proportion of Credit Sales
% CreditSales on Cash Disc.
Cash Discount Term
Bad Debt Cost
Contribution Margin
Tax Rate (1-t)
Post Tax Cost of Capital
STEP ONE: Contribution
Incremental Sales
Total Contribution
Incremental Contribution

800
nil
20
70%
50%
1%
12%
20%
60%
12%

nil

a
Credit Std
Unltd to Ctgry 3&4
850
50
20
70%
50%
1%
12%
20%
60%
12%

(in Rs Millions)
b
c
Credit Prd
Cash Dsct
From 30 to 60 days 2/10 net 30
840
820
40
20
50
16
70%
70%
20%
70%
1%
2%
NA
NA
20%
20%
60%
60%
12%
12%

50
170
10

40
168
8

20
164
4

298
2.98
0.18

118
1.18
-1.62

402
8.04
5.24

Bad Debt Cost

6.00

0.00

0.00

Incrmntl Oprtng Cost

6.18

-1.62

5.24

3.83
2.30

9.62
5.77

-1.24
-0.74

47.22
2.78
0.33

116.67
72.22
8.67

36.44
-8.00
-0.96

1.96
82.6%
Yes

-2.89
8.0%
No

0.22
9.3%
Yes

STEP TWO: Cost


Cash Discount Sales
Cash Discount Cost
Incremental Cash Disc. Cost

160

280
2.80

STEP THREE: Operating Income


Operating Income
After Tax Oprtng Income (1-Tax Rate)

STEP FOUR: Investments


Total Invstement in Rcvbls
Incremental Investment
Cost of Incrmntl Invstmnt
STEP FIVE: Residual Income
Residual Income
Incremental ROI OpInc/ Incrtl
Decision

44.44
5.33

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