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

Question

Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 180 units have been made by customers requesting credit. The variable cost is $11,400 per unit, and the credit price is $14,000 each. Credit is extended for one period. The required return is 1.8 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 even period forever and the remaining customers will be one-time orders. Calculate the NPV of the decision to grant credit. (Round your answer to 2 decimal places, (e.g.. 32.16))

Explanation / Answer

For 40% customers i.e. 72 customers

Net cash flow = 72*(14000-11400) = 187200

Opportunity cost = (72*11400)*1.80% = 14774

Net benefit = 187200-14774 = 172426

For remaining customer i.e.108

Net cash flow = 108*(14000-11400) = 280800

Net NPV for credit decision = 280800+172426 = 453226

It is adviced to give credit.

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