A firm currently sells its product with a 2% discount to customers who pay by cash or credit card when they purchase one of the firm's products;otherwise,the full price is due within 30 days.Forty percent of customers take advantage of the discount.The firm plans to drop the discount so the new terms will simply be net 30.In doing so it expects to sell 100 fewer units per month and all customers to pay at day 30.The firm currently sells 1000 units per month at a cost per unit of $45 and a selling price per unit of $80.If the firm's required return is 2%,what is the net present value (NPV)of making this change?

Question

Quizplus · Accepted Answer

The NPV of making the change is calculated by considering the loss in sales revenue from selling 100 fewer units per month and the impact of losing the 2% discount incentive. The firm loses the benefit of early cash flow from the 40% of customers who previously paid early. The NPV calculation involves determining the present value of the lost cash flows over time, considering the firm's required return of 2%. The correct NPV is -$169,860, indicating a negative impact from the change.

A Firm Currently Sells Its Product with a 2% Discount