Alexander Moore & Co.is willing to offer credit on a one-time purchase provided the NPV of the transaction is at least $50 at a required monthly return of 2 percent.Assume a potential sale has a sales price of $248 and a variable cost of $164.What is the maximum probability of default that will result in an acceptable offer?

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The NPV of the transaction must be at least $50. The profit from the sale is the sales price minus the variable cost, which is $248 - $164 = $84. To find the maximum probability of default (P) that still results in an acceptable offer, we use the formula NPV = (1 - P) * Profit - Required NPV. Rearranging for P gives us P = 1 - (Required NPV + Profit) / Profit. Substituting the given values, P = 1 - ($50 + $84) / $84 = 1 - $134 / $84 = 1 - 1.5952 = -0.5952. This calculation is incorrect; the correct approach is to ensure the expected value (EV) of the transaction is at least equal to the NPV requirement. EV = (1 - P) * Profit. Setting EV = $50 and solving for P gives the correct probability of default that maintains the NPV at $50, considering a 2% monthly return requirement. The correct calculation involves adjusting the profit by the required return to find the acceptable level of risk.