Xian Corporation predicts that if a customer pays on the first sale, it is assured that it is a reliable customer.As such, it expects that customer to generate a net profit of $700 per year for 10 years.Ajax calculates present value with a 9% rate of return.There is a 70% probability that Ajax will secure a reliable customer.However, if the customer defaults, Ajax will have to incur a loss of $800.Determine the expected benefit if credit is granted.
A)$2,804
B)$2,904
C)$3,004
D)$3,104

Question

Quizplus · Accepted Answer

The expected benefit can be calculated as the product of the probability of securing a reliable customer and the expected net profit from that customer, minus the product of the probability of default and the loss incurred in that case.
Expected benefit = (0.70 x $700 x 7.360) - (0.30 x $800) = $2,904
Therefore, the best choice is B.

Xian Corporation Predicts That If a Customer Pays on the First