You have the opportunity to make a one-time sale if you will give a new customer
ID: 2717451 • Letter: Y
Question
You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 40 percent chance that this person will never pay you. The sales price of the item the customer wants to buy is $249. Your variable cost on that item is $174 and your monthly interest rate is 1.5 percent. Should you grant credit to this customer? Why or why not?
You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 40 percent chance that this person will never pay you. The sales price of the item the customer wants to buy is $249. Your variable cost on that item is $174 and your monthly interest rate is 1.5 percent. Should you grant credit to this customer? Why or why not?
a. yes; because the net present value of the potential sale is $75
b. yes; because the net present value of the potential sale is $249
c. no; because the net present value of the potential sale is -$27
d. no; because the net present value of the potential sale is -$174
e. it doesn’t matter; because the NPV of the potential sale is zero
a. yes; because the net present value of the potential sale is $75
b. yes; because the net present value of the potential sale is $249
c. no; because the net present value of the potential sale is -$27
d. no; because the net present value of the potential sale is -$174
e. it doesn’t matter; because the NPV of the potential sale is zero
Explanation / Answer
NPV => -174 + ( 1 - 0.40) * [ 249 / ( 1 + 0.015) ]
=> - $26.80 or -$ 27
So, Option C ie no; because the net present value of the potential sale is -$27
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