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A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase sales from 170 to
A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase sales from 170 to 190 units per month. The price per unit is $101, and the cost (in present value terms) is $60. The interest rate is 1% per month. Required: a-1. What would be the NPV of a change in the firm's credit policy? a-2. Should the firm change its credit policy? b-1. If 5% of all customers fail to pay their bills under the new credit policy, what would be the NPV of the change in credit policy? b-2. Should the firm change its credit policy? Assume 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. c-1. What is the value of new customers? c-2. What is the net benefit from advancing credit? c-3. Should the firm change its credit policy?
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