You are considering setting up a booth at a street fair in a town not far from where you are located. Any sale you make will be a one-time sale. There is only a 50 percent chance that you will collect
Your money on a credit sale. The product you want to sell has a variable cost of $3.90 and a sales
Price of $5.00. The monthly interest rate is 1.5 percent. Should you offer people 30 days to pay?
Why or why not?

Question

Quizplus · Accepted Answer

Since there is only a 50 percent chance of collecting the money on a credit sale, we can consider the potential sale as a risky investment. Using the formula for net present value (NPV), we can calculate the expected value of the potential sale:

NPV = (0.5 * $5.00) - (0.5 * $3.90)/(1 + 0.015)^1 - $3.90

NPV = $0.55 - $3.90

NPV = -$3.35

Therefore, offering people 30 days to pay would result in a negative NPV of -$1.44 ($3.35 discounted back to present value), meaning that it would not be financially worth it to offer credit sales.

You Are Considering Setting Up a Booth at a Street