A firm is evaluating a $100,000 sales opportunity from a new customer. The customer is expected to mirror the firms historical collection experience, as follows: S - EXP(S) NPV = VCR(S) 1 + iCP (2) (3) (4) (5) (6) COLLECTION PERIOD (CP) DSO PAYMENT PROBABILITY COLLECTION COSTS (EXP) COLLECTION CASH FLOW PV [PV of Column (5) less (VCR)(S) (7) Expected PV [Column (3) Column (611 $12,709.46 s 60 Days 50 60% $2,500 $97,500 $21,182.43 61 - 75 Days 68 25% $5,000 $95,000 $18,262.51 $4,565.63 76 - 90 Days 89 10% $7,500 $92,500 $15,298.21 $1,529.82 > 90 Days 115 5% $47,500 $27,500 1948 339.97) ($2,417.00) Expected NPV of Credit Extension 100% $16,387.91 The purpose of this analysis is: To consider the weighted average of the possible outcomes based on the firms historical collection experience for a proposed new customer sale To consider over-arching changes to a firm's credit policy to affect sales, improve the quality of the AR, or some other firm objective Should trade credit be offered? Why? Yes, because NPV is positive No, because there is a 5% chance that the sale will lose a lot of money