Crisps has received an order for 10000 bags of potato chips from BigBag. Crisps

Question

Crisps has received an order for 10000 bags of potato chips from BigBag. Crisps views BigBag to be a long-term customer and believes they will continue to place the same order year after year forever. Crisps sells its large bags of potato chips for $1.85 each, and calculates its internal cost for the product at $1.35 each. Market research estimates that there is a 27% chance that BigBag will pay in full what it owes. Crisps uses a discount rate of 6.65% for all NPV analysis.

Based on this information, calculate the NPV of this credit decision?

$_______

Place your answer to the nearest dollar. Do not use a Dollar sign or commas within your answer.

Explanation / Answer

Cost = 10000*1.35 = 13500

Actual revenue = 1.85*10000 = 18500

Expected collection = 27%*185000 = 49950

NPV = -135000 + 49950 / (1+6.65%) = -88165

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