On each nondelinquent sale Cast Iron receives revenues with a present value of $

Question

On each nondelinquent sale Cast Iron receives revenues with a present value of $1,360 and incurs costs with a present value of $1,210. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .85. a-1. What is the expected profit of granting credit? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected profit $ per sale a-2. Should Cast Iron grant or refuse credit? Refuse Grant b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.) Break-even probability %

Explanation / Answer

(a) Present Value of Cost = $1,210

Total Present Value of Revenue = ($1,360*0.85) + ($0*0.15) = $1,156

Net Present Value = $1,156 - $1,210 = - $ 54

As the net present value is Neative, Cast Iron should Refuse Credit

(b) Break Even probability of collection = $1,210 / $1,360 = 88.9%

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