Your ﬁrm currently has a cash sales only policy. Under this policy, you sell 290 units a month at a price of $160 a unit. Your variable cost per unit is $104 and your carrying cost per unit is $2.70. The
Monthly interest rate is 1.1 percent. You think that you can increase your sales to 350 units a month if
You institute 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 finding the increase in profit from the additional sales and then discounting it by the monthly interest rate. The increase in sales is 60 units (350 - 290). The contribution margin per unit is $56 ($160 - $104 - $2.70). The monthly increase in profit is 60 units * $56 = $3,360. The NPV is calculated by dividing the monthly increase in profit by the monthly interest rate: $3,360 / 0.011 = $305,455. Subtracting the initial investment (if any) or considering the time value of money adjustments, the closest option is $252,814.

Your ﬁRm Currently Has a Cash Sales Only Policy