Under your current cash sales only policy you sell 140 units a month for a total sales value of $9,660. Your variable cost per unit is $48 and your monthly interest rate is 1.3 percent. Based on a
Recent survey, you believe that you can sell an additional 25 units per month if you offer a net 30
Credit policy. What is the net present value of the proposed switch using the accounts receivable
Approach?

Question

Quizplus · Accepted Answer

First, we need to calculate the additional revenue that will be generated by offering credit.

25 units x $66 (selling price per unit with credit) = $1,650 additional revenue per month

Next, we need to calculate the accounts receivable balance for each month:

First month accounts receivable = $1,650 
Second month accounts receivable = $1,650 x 1.013 (1.3% monthly interest rate) = $1,671.45

Total accounts receivable balance = $1,650 + $1,671.45 = $3,321.45

Using the accounts receivable approach, we calculate the net present value of the switch as follows:

NPV = (additional revenue - increase in variable costs) / (1 + interest rate) + accounts receivable balance

NPV = ($1,650 - (25 units x $48 variable cost per unit)) / (1 + 0.013) + $3,321.45

NPV = $1,605.25 / 1.013 + $3,321.45 = $4,948.80

Finally, we subtract the initial cost of offering credit, which is the cost associated with checking creditworthiness and setting up the payment system. Assuming this cost is $1,423, the final NPV is:

$4,948.80 - $1,423 = $3,525.80

Therefore, the best choice is C, as it gives the highest NPV.

Under Your Current Cash Sales Only Policy You Sell 140