1. Solar Engines manufactures solar engines for tractor-trailers. Given the fuel

Question

1. Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 120 units have been made by customers requesting credit. The variable cost is $9,000 per unit, and the credit price is $11,000 each. Credit is extended for one period. The required return is 1.5 percent per period. If Solar Engines extends credit, it expects that 40 percent of the customers will be repeat customers and place the same order every period forever and the remaining customers will be one-time orders.

2. Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 185 units have been made by customers requesting credit. The variable cost is $11,600 per unit, and the credit price is $14,250 each. Credit is extended for one period. The required return is 1.9 percent per period and the probability of default is 15 percent. Assume the number of repeat customers is affected by the defaults. In other words, 30 percent of the customers who do not default are expected to be repeat customers.

Calculate the NPV of the decision to grant credit. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

1)NPV = -C0q0 +[Q0p0/(1+r)^T]

           = (-9000*120)   + [120*11000/(1+015)^1]

           = -1,080,000 + [1,320,000/(1.015)

          = -1080000 +1,300,492.61

          = $ 220,492.61

2)NPV = -c0q0 + [h* (p0q0) /(1+r)^t]

            = - 11600 *185   + [ .15* (14250*185)/ (1+.019)^1]

           = -2,146,000   + [.85*2636250 /(1.019)^1]

          = - 2146000 + [2,240,812.50/1.019]

          =   - 2146000 + 2,199,030.91

          = 53,030.91

**Where, c0q0 = variable cost *quantity

             p 0q0 = price *quantity

             R=rate of discount

            H=proability of repayment = (1-.15 )= .85

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.