Question
Barn Yard Inc. is a wholesaler that stocks engine components and tests equipment for the commercial aircraft industry. A new customer has placed an order
Barn Yard Inc. is a wholesaler that stocks engine components and tests equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.6 million per unit, and the credit price is $1.725 million each. Credit is extended for one period, and based on historical experience, payment for about one out of every 200 such orders is never collected. The required return is 1.8% per period. a-1. What is the NPV per engine purchased on credit? (Do not round intermediate calculations. Enter your answers in thousands of dollars. Omit $ sign in your response. Negative answer should be indicated by a minus sign.) NPV $ per unit a-2. Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended. Yes No b. What is the break-even probability of default in part (a)? (Do not round intermediate calculations. Break-even probability % c-1. Suppose that customers who dont default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. What is the NPV per engine purchased on credit? (Do not round intermediate calculations. Enter the answer in dollars. Round the final answer to 2 decimal places. Omit $ sign in your response. Negative answer should be indicated by a minus sign.) NPV $ per unit c-2. Assuming the customer becomes a repeat customer, what is the break-even probability of default? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Break-even probability %
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