Home Accents currently sells 219 units a month at a price of $46 a unit. If it switches to a net 30 credit policy, monthly sales are expected to increase by 28 units. The monthly interest rate is .57 percent and the variable cost per unit is $21. What is the net present value of the proposed credit policy switch?

Question

Quizplus · Accepted Answer

The net present value of the proposed credit policy switch is $112,145. This is because the increase in sales will generate additional revenue of $1,288 per month ($28 units x $46 per unit). The variable cost of these additional units will be $588 per month ($28 units x $21 per unit). The net increase in revenue will be $700 per month ($1,288 - $588). The present value of this net increase in revenue over a 12-month period is $8,400 ($700 x 12). The cost of the credit policy switch is the interest expense on the accounts receivable. The average accounts receivable balance will be $2,100 ($28 units x $46 per unit x 30 days / 365 days). The interest expense on this balance will be $12.06 per month ($2,100 x .57% / 12). The present value of this interest expense over a 12-month period is $144.72 ($12.06 x 12). The net present value of the credit policy switch is $8,400 - $144.72 = $112,145.

Home Accents Currently Sells 219 Units a Month at a Price