What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

Question

Quizplus · Accepted Answer

The break-even probability of collection is calculated by setting the profit margin equal to the expected loss from non-collection. With a 25% profit margin, the firm needs at least a 75% probability of collection to break even, as shown by the equation: 0.25 = 0.75 * (1 - x), solving for x gives x = 0.75 or 75%.

What Is the Minimum Probability of Collection That Should Be