Comment and Correction: Opportunity Cost in the Evaluation of Investment in Accounts Receivable

In a recent issue of Financial Management, John Oh argues that the conventional practice of measuring the dollar expense of accounts receivable in terms of variable production costs underestimates the relevant capital costs of more liberal credit policies. As an alternative, he suggests that the market value of credit sales should be used to measure the investment expense of accounts receivable. Although we agree with Oh's criticism of the conventional practice, we believe that the amended version he advances is itself an incorrect method for evaluating investments in receivables. We contend that such a measurement overestimates the opportunity expense of credit-