Under your current cash sales only policy you sell 110 units a month for a total sales value of $7,590. Your variable cost per unit is $38 and your monthly interest rate is 1.7 percent. Based on a recent survey, you believe that you can sell an additional 30 units per month if you offer a net 30 credit policy. What is the net present value of the proposed switch using the accounts receivable approach?

Question

Quizplus · Accepted Answer

The net present value of the proposed switch using the accounts receivable approach is $45,976. This is because the additional sales will generate $10,800 in additional revenue per year ($30 units x $360 per unit). The variable cost of these additional sales will be $11,400 per year ($30 units x $38 per unit). The net income from these additional sales will be $3,600 per year ($10,800 - $11,400). The present value of these additional net income streams is $45,976 ($3,600 / 0.078).

Under Your Current Cash Sales Only Policy You Sell 110