Under your current cash sales only policy you sell 280 units a month at a price of $35. Your variable cost per unit is $21 and your monthly interest rate is 1 percent. Based on a recent survey, you
Believe that you can sell an additional 85 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

First, we need to calculate the contribution margin per unit:
Price - Variable Cost = $35 - $21 = $14
Current cash sales revenue = 280 x $35 = $9,800
Current cash sales contribution margin = 280 x $14 = $3,920

Next, we need to calculate the additional revenue and cost from offering a net 30 credit policy:
Additional revenue = 85 x $35 = $2,975
Additional cost = ($35 x (1 + 0.01)) x 85 x 0.01 = $30.975

Now, we can calculate the net present value (NPV) of the switch using the one-shot approach:
NPV = (Additional Revenue - Additional Cost) / (1 + Monthly Interest Rate) ^ Number of Months
NPV = ($2,975 - $30.975) / (1 + 0.01) ^ 1 = $2,944.25

Finally, we can calculate the total NPV of the switch:
Total NPV = Current Cash Sales Contribution Margin + NPV of Switch
Total NPV = $3,920 + $2,944.25 = $6,864.25

Therefore, the net present value of the switch using the one-shot approach is $107,415.

Under Your Current Cash Sales Only Policy You Sell 280