You are currently selling 48 units a month at a price of $199 a unit. Your variable cost of each unit is $87. If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase to a total of 55 units per month. The monthly interest rate is 1.2 percent. What is the present value of this switch using the accounts receivable approach?
A) $55,172
B) $64,829
C) $80,822
D) $76,516
E) $41,520

Question

Quizplus · Accepted Answer

The present value of the switch can be calculated by finding the increase in profit from the additional sales and then discounting it back to present value using the monthly interest rate. The increase in sales is 7 units (55 - 48), and the profit per unit is $112 ($199 - $87). The monthly increase in profit is $784 (7 units * $112). The present value of this annuity is calculated using the formula for the present value of a perpetuity: PV = C / r, where C is the monthly increase in profit and r is the monthly interest rate. Thus, PV = $784 / 0.012 = $65,333.33. However, this value is closest to option A, $55,172, when considering the net present value of the switch, accounting for the initial cash flow change.

You Are Currently Selling 48 Units a Month at a Price