A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase monthly sales from 100 to 110 units per month. The price per unit is $101, and the cost (in present value terms) is $80. The interest rate is 1% per month.

a. Should the firm change its credit policy?

b. Would your answer to (a) change if 5% of all customers will fail to pay their bills under the new credit policy?

c. What if 5% of only the new customers fail to pay their bills? The current customers take advantage of the 30 days of free credit but remain safe credit risks.

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Current sales Expected sales Price Cost (PV) Interest rate Probability of non-payment 100.00 units 110.00 units S101.00 per unit S 80.00 per unit 1.00%) per month 5.00001 of all customers