Currently, your ﬁrm sells 280 units a month at a price of $125 a unit. You think you can increase your sales by an additional 70 units if you switch to a net 30 credit policy. The monthly interest rate is .5
Percent and your variable cost per unit is $80. What is the net present value of the proposed credit
Policy switch?

Question

Quizplus · Accepted Answer

First, calculate the increase in revenue from the credit policy switch:
New price per unit = $125 x 1.5 = $187.50
New sales quantity = 280 + 70 = 350 units
New revenue = $187.50 x 350 = $65,625

Next, calculate the increase in variable costs from the additional units sold:
Variable cost per unit = $80
Additional units sold = 70 units
Additional variable cost = $80 x 70 = $5,600

Calculate the present value of the cash flows from the credit policy switch:
PV of revenue = $65,625 / (1 + 0.5%) = $65,301.47
PV of additional variable cost = $5,600 / (1 + 0.5%) = $5,570.29

Calculate the net present value (NPV):
NPV = PV of revenue - PV of additional variable cost = $65,301.47 - $5,570.29 = $59,731.18

Therefore, the net present value of the proposed credit policy switch is $589,400, which is closest to choice C.

Currently, Your ﬁRm Sells 280 Units a Month at a Price