Risk should be incorporated into the decision to grant credit by:
A) decreasing the discount rate.
B) increasing the credit period to allow for customers in financial distress to reorganize.
C) decreasing the cash inflows, or the numerator of the NPV formula.
D) increasing the cash inflows, or the numerator of the NPV formula.
E) increasing costs per unit.

Question

Quizplus · Accepted Answer

Risk should be incorporated into the decision to grant credit by reducing the cash inflows (numerator of the NPV formula). This is because the discount rate used to calculate the present value of future cash flows should be increased to reflect the increased risk involved in granting credit. By decreasing the cash inflows in the numerator of the NPV formula, the impact of the increased discount rate on the present value of future cash flows is mitigated. This ensures that the credit decision is based on a realistic assessment of the risk involved. Hence, the best choice is C.

Risk Should Be Incorporated into the Decision to Grant Credit