You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect there is a 20 percent chance this person will never pay you. The sales price of the item the customer wants to buy is $136. Your variable cost on that item is $94 and your monthly interest rate is 2.5 percent. Should you grant credit to this customer? Why or why not?

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Quizplus · Accepted Answer

The net present value of the potential sale is $12. This is calculated as follows:Sales price: $136Variable cost: $94Gross profit: $42Probability of payment: 80%Expected gross profit: $42 x 0.80 = $33.60Monthly interest rate: 2.5%Discount factor for 30 days: 1 / (1 + 0.025)^30 = 0.9662Net present value: $33.60 x 0.9662 = $32.40

You Have the Opportunity to Make a One-Time Sale If