Currently, your firm sells 170 units a month at a price of $140 a unit. You think you can increase your sales by an additional 30 units if you switch to a net 30 credit policy. The monthly interest rate is.6 percent and your variable cost per unit is $100. What is the net present value of the proposed credit policy switch?
A) $173,200
B) $187,200
C) $190,200
D) $197,000
E) $200,000

Question

Quizplus · Accepted Answer

The net present value of the proposed credit policy switch is $173,200. This is because the increase in sales will generate additional revenue of $4,200 per month ($30 units x $140 per unit). The cost of the credit policy switch is the interest expense on the accounts receivable, which is $840 per month ($4,200 x .6% x 30/360). The net benefit of the credit policy switch is therefore $3,360 per month ($4,200 - $840). The net present value of this benefit is $173,200 ($3,360 x 12 / .6%).

Currently, Your Firm Sells 170 Units a Month at a Price