You are currently selling 75 units a month at a price of $495 a unit. Your variable cost of each unit is $360. If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase by 20 percent. Your monthly interest rate is 1 percent. What is the net present value of this proposed switch using the accounts receivable approach?

Question

Quizplus · Accepted Answer

The net present value (NPV) of the proposed switch can be calculated by determining the increase in sales, the additional profit from these sales, and then discounting this profit by the monthly interest rate. The increase in sales is 20% of 75 units, which is 15 units, making the total sales 90 units. The profit per unit is $495 - $360 = $135. The additional profit from the increased sales is 15 units * $135 = $2,025. The NPV is calculated by dividing this additional profit by the monthly interest rate (1%), which gives $2,025 / 0.01 = $202,500. However, since the question asks for the NPV of the switch, we must consider the present value of the original sales, which is 75 units * $135 = $10,125. The NPV of the switch is the difference between the NPV of the increased sales and the original sales, which is $202,500 - $42,525 = $159,975.

You Are Currently Selling 75 Units a Month at a Price