You are trying to attract new customers that you feel could become repeat customers. The average price of the items you sell is $16 with a $9.50 variable cost. Your monthly interest rate is 1.5 percent. Your experience tells you that 6 percent of these customers will never pay their bill. What would be the net present value of this decision?
A) -$217
B) -$198
C) $17
D) $351
E) $398

Question

Quizplus · Accepted Answer

The net present value (NPV) can be calculated by considering the average price of the items, the variable cost, the monthly interest rate, and the percentage of customers who will never pay their bill. The calculation is as follows:1. Calculate the net profit per item: $16 (average price) - $9.50 (variable cost) = $6.50.2. Adjust for the percentage of customers who will never pay: 94% of customers will pay (100% - 6% = 94%), so the adjusted net profit per item is $6.50 * 94% = $6.11.3. Calculate the NPV considering the monthly interest rate of 1.5%. Since the interest rate and time period are not directly used in the calculation provided, we focus on the adjusted net profit per item. The NPV calculation typically involves discounting future cash flows, but without specific time frames or additional cash flows, we simplify to the adjusted net profit.Given the information provided, the correct calculation involves adjusting the net profit per item for the percentage of paying customers. The choice that most closely matches this calculation is $398, indicating an overall positive NPV for attracting new customers under these conditions.

You Are Trying to Attract New Customers That You Feel