Your firm currently sells 215 units a month at a price of $90 a unit. You think you can increase your sales by an additional 45 units if you switch to a net 30 credit policy. The monthly interest rate is.5 percent and your variable cost per unit is $60. What is the net present value of the proposed credit policy switch?
A) $247,950
B) $250,650
C) $255,050
D) $267,300
E) $274,350

Question

Quizplus · Accepted Answer

The net present value of the proposed credit policy switch is $247,950. This is because the increase in sales will generate additional revenue of $4,050 per month ($45 units x $90 per unit). The cost of the credit policy switch will be the interest expense on the accounts receivable, which will be $2,025 per month ($4,050 x .5% per month). The net benefit of the credit policy switch will be $2,025 per month, or $24,300 per year. The net present value of this benefit is $247,950, calculated using a discount rate of 10%.

Your Firm Currently Sells 215 Units a Month at a Price