Under your current cash sales only policy you sell 170 units a month at a price of $42. Your variable cost per unit is $28 and your monthly interest rate is 1.25 percent. Based on a recent survey, you believe that you can sell an additional 60 units per month if you offer 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 determining the additional profit from selling 60 more units per month and discounting it at the monthly interest rate. The additional profit per unit is the selling price minus the variable cost ($42 - $28 = $14). The monthly additional profit is 60 units * $14 = $840. The NPV is calculated as $840 / 0.0125 (monthly interest rate) = $67,200. However, since the switch involves offering credit, the NPV is adjusted for the cost of offering credit, resulting in an NPV of $58,380.

Under Your Current Cash Sales Only Policy You Sell 170