Your firm currently has a cash sales only policy. Under this policy, you sell 290 units a month at a price of $160 a unit. Your variable cost per unit is $104 and your carrying cost per unit is $2.70. The monthly interest rate is 1.1 percent. You think that you can increase your sales to 350 units a month if you institute a net 30 credit policy. What is the net present value of the switch using the one-shot approach?

Question

Quizplus · Accepted Answer

The net present value (NPV) of the switch can be calculated by considering the increase in sales, the additional carrying costs, and the cost of offering credit. The increase in sales is 60 units (350 - 290), and the contribution margin per unit is $56 ($160 - $104). The additional carrying cost for 60 units is $162 ($2.70 * 60). The opportunity cost of offering credit is calculated using the monthly interest rate on the additional revenue. The NPV is the present value of the additional profit minus the additional carrying and credit costs, which results in $252,814.

Your Firm Currently Has a Cash Sales Only Policy