Your company is considering granting credit to a new customer on a one time sale. The price per unit is $225 and the variable cost per unit is $175. The chance of default is 20% and the monthly interest rate is 1%. The customer will pay in 30 days if they do not default. What is the NPV of granting credit?
A) $1.38
B) $3.22
C) $4.32
D) $5.50
E) $6.00

Question

Quizplus · Accepted Answer

The NPV of granting credit can be calculated using the formula: NPV = p(1-d)(R-C)/(1+i) - dC, where p is the price per unit, d is the default rate, R is the revenue per unit, C is the cost per unit, and i is the monthly interest rate. Here, p = $225, d = 20% or 0.2, R = $225, C = $175, and i = 1% or 0.01. Plugging these values into the formula gives: NPV = 225(1-0.2)(225-175)/(1+0.01) - 0.2*175 = $3.22.

Your Company Is Considering Granting Credit to a New Customer