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 190 units have been made by customers requesting credit. The variable cost is $11,800 per unit, and the credit price is $14,500 each. Credit is extended for one period. The required return is 2.0 percent per period. If Solar Engines extends credit, it expects that 25 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. Calculate the NPV of the decision to grant credit. (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Given data,

Number of units ordered by customers = 190

Variable Cost = $11800

Credit Price = $14500

Required Return = 2%

Contribution earned = (Credit Price - Variable Cost) * Number of uunits

= (14500 - 11800) * 190

= $513000

Repeated Contribution due to credit scheme = $513000 * 25% = $128250

Calculation of NPV:

NPV 0f the decision to grant credit = $6666378.50

Hence credit can be granted

Year Cash Flow PVIF (2%) PV of Cash Flow 1 $513000 0.98039 $502940 2 $6412500 (128250/2%) 0.96116 $6163438.50 $6666378.50

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