Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.
A) No; the expected loss is $33.33.
B) No; the expected loss is $150.00.
C) Yes; the expected profit is $33.33.
D)Yes; the expected profit is $150.00.

Question

Quizplus · Accepted Answer

Expected profit = 0.65[$2,000 × (0.50/1.50)] - (1 - 0.65)[$2,000 × (1/1.50)] = -$33.33

Should Credit Be Granted to a Customer Wishing to Purchase