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.

Question

Quizplus · Accepted Answer

The expected loss calculation shows that there is a higher probability of loss than profit, therefore granting credit in this situation would not be advisable. The expected loss is $33.33, meaning that on average, for every $2,000 item sold, the company can expect to lose $33.33.

Should Credit Be Granted to a Customer Wishing to Purchase