Lemius Industries is considering a net 30-day credit policy, which it believes will increase sales by 25%. Currently Lemius sells 800 units a month at a retail price of $45 a unit and a variable cost of
$32 each. Lemius has a required monthly rate of return of 1.75%. What is the net present value of
This possible switch in credit policies?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by determining the additional profit from the increased sales, discounting it by the required rate of return. The increase in sales is 25% of 800 units, which is 200 units. The contribution margin per unit is $45 - $32 = $13. The additional monthly profit is 200 units * $13 = $2,600. The NPV is calculated by dividing the additional profit by the monthly rate of return: $2,600 / 0.0175 = $148,571.43. However, since this is a monthly rate, we need to adjust for the time value of money over a year (12 months), which results in an NPV of approximately $106,171.

Lemius Industries Is Considering a Net 30-Day Credit Policy, Which