Which one of the following credit decisions appears correct for a customer who intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?
A) Reject because expected loss equals $320
B) Reject because expected profit equals $0
C) Accept because expected profit equals $1,440
D)Accept because expected profit equals $3,200

Question

Quizplus · Accepted Answer

Expected profit = (1 - 0.20) × [($1,000 × 0.20)/0.10] - 0.20 × [$1,000 × (1 - 0.20)] = $1,440

Which One of the Following Credit Decisions Appears Correct for a Customer