Evaluating Credit Policy Silicon Wafers plc (SW), is debating whether to extend credit to a particular customer.

SW’s products, primarily used in the manufacture of semiconductors, currently sell for £1,850 per unit. The variable cost is £1,200 per unit. The order under consideration is for 12 units today; payment is promised in 30 days. Assume that this is a one-time sale and the customer will not buy if credit is not extended.

(a) If there is a 20 per cent chance of default, calculate the net present value. Should SW fill the above order?

(b) What is the break-even probability in part (a)?