If the probability of collection is 65%,should you grant credit to a customer wishing to purchase a $2,000 item that cost $1,333.33 to produce? Assume all cash flows are discounted to present value and there is no chance of subsequent sales.
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 − $1,333.33] − (1 − 0.65)[$$1,333.33] = −$33.33

If the Probability of Collection Is 65%,should You Grant Credit