Jungle, Inc., currently has an all-cash credit policy. It is considering making

Question

Jungle, Inc., currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what is the break-even price per unit under the new credit policy? The required return is .88 percent per month. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current Policy $ 235 $ 173 1,680 New Policy Price per unit Cost per unit Unit sales per month $ 178 1,735 Break-even price

Explanation / Answer

Lets say New Price be x

Cash flow = (P – v) Q

Cash flows from

Old policy = (235-173)(1680)=104160

New Policy=(x-178)*1735

Incremental perpetuity cash flow=(x-178)*1735-104160

Cost of switching to new policy=(P-C)*Q+Cnew*(Qnew)=(235-173)*1680+178*1735=412990

NPV=-412990+((x-178)*1735-104160)/0.0088

As the minimum NPV required to change credit policy is zero, 0=-412990+((x-178)*1735-104160)/0.0088

hence, x=240.13

So, breakeven price =$ 240.13

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