You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 50 percent chance that this person will never pay you. The sales price of
The item the customer wants to buy is $325. Your variable cost on that item is $219 and your
Monthly interest rate is 1 percent. You _____ grant credit because the net present value of the sale
Is _____.

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the sale, we need to consider the cash inflows from the sale and the cash outflows associated with the variable cost of the item and the potential loss from non-payment.

Cash inflow = $325 (the sales price)
Cash outflows:
- Variable cost = $219 
- Potential loss from non-payment = 0.5 x $325 = $162.50

We also need to consider the time value of money, since we are offering 30-day credit terms and have a monthly interest rate of 1%. To calculate the NPV, we can use the following formula:

NPV = (cash inflow / (1 + monthly interest rate))^number of periods - cash outflows

In this case, the number of periods is 1 (since we are looking at the net present value of the sale in the current month). Plugging in the numbers, we get:

NPV = ($325 / (1 + 0.01))^1 - ($219 + $162.50)
NPV = $321.78 - $381.50
NPV = -$59.72

Since the NPV of the sale is negative, we should not grant credit to the new customer. Option C is the correct answer.

You Have the Opportunity to Make a One-Time Sale If