What credit decision is appropriate for a potential customer that offers a 75% chance of paying on a $10,000 sale which has an 80% cost?
A) Grant credit since the expected profit is $3,200.
B) Grant credit since the expected profit is $800.
C) Refuse credit since the expected profit is negative.
D) Refuse credit since the expected loss is zero.

Question

Quizplus · Accepted Answer

Expected profit from offering credit = 0.75 × PV($10,000 − 8,000) − 0.25 × PV($8,000) < $0

What Credit Decision Is Appropriate for a Potential Customer That