Answer:
c. $488.77
Explanation:
Step 1: Calculate Accounts Receivable for Industry DSO
The accounts receivable for industry DSO is calculated as below:
Accounts Receivable (Industry DSO) = Sales Value*Industry Average DSO/Total Days in the Year
Using the values provided in the question in the above formula, we get,
Accounts Receivable (Industry DSO) = 167,500*27/365 = $12,390.41
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Step 2: Calculate Value of Freed-Up Cash
The value of freed-up cash is determined as below:
Freed-Up Cash = Value of Accounts Receivable at Company's DSO - Value of Accounts Receivable for Industry Average = 18,500 - 12,390.41 = $6,109.59
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Step 3: Calculate Effect of Net Income
The effect on net income is calculated as below:
Effect on Net Income = Freed-Up Cash*Rate of Return = 6,109.59*8% = $488.77
