hi there, I have already answer of the following but it is so hard to figure what formulas you have used. can you please send it to me
Tricia Velasquez wishes to apply NPV analysis to a newly received order. The company's credit terms are net 45 days. Its opportunity cost of funds is 12 percent. The order dollar amount is $30,000. She finds out from cost accounting department that variable costs are approximately 65 percent of sales and that incremental credit administration and collection expenses approach 1 percent of sales. a. Assuming that the customer will pay according to the credit terms, with perfect certainty, should Tricia approve the order? b. Assume that further research indicates that payment probabilities and timing for accounts similar to the credit applicant are as follows: Payment timing: probability With 45 days .50 4560 days .30 6090 days .15 Over 90 days .05 Assume that payments are received evenly within the above time brackets. The company's experience is that payment received after 90 days is gotten only after referral to a collection agency. The agency charges 30 percent of the dollar amount of the invoice. It collects, on average, 65 percent of the invoice amount, about one month after referral. Before the agency referral at day 90, and after the 45 days, the company incurs an additional $125 collection cost every 15 days. Based on the expected NPV of the revised situation, should Tricia recommend credit extension? Answer: a Credit terms = 45 days Opportunity cost = Cot per day = Amount of invoice = Variable cost = Credit administartion and collection cost Variable cost = = 65% * 30000 19500 Calculating present value of collection Invoice cost = Less: Credit cost = Present value = 29700 * 1/(1+(.12/365))*45) = = = 12% 0.0003288 65% 65% of sales 1% of sales 30000 300 29700 $29,267.01 29267.01 19500 9767.01 Trcia should approve the order as NPV > 0 b Payment timings 90 days Probability 0.5 0.3 0.15 0.05 1 The company will spend the variable cost associated with the sale upfront but will only receive the expected value of the invoice overtime. Payment date 90 days Expected collection 22.5 52.5 75 120 Payment probability Net cash flow Additional cost PV factor PV NPV NPV as per probability 0.5 0 29700 0.993 29481.915 9981.9146 4990.9573 0.3 125 29575 0.983 29073.189 9573.1888 2871.9566 0.15 250 29325 0.976 28619.318 9119.3182 1367.8977 0.05 9250 9950 0.962 9572.3511 9927.649 496.3824 Total NPV 8734.4292 Note: Expected collection: The range of expected collection is half of the range mentioned, like 22.5 for range 045, 52.5 is half of the range 4560etc Note: Additional cost There are no collection costs for payment in 45 days or less; for 52.5days, however, the additional collection costs (beyond the 1% * $30,000) are$125; for 75.5 days the additional collection costs (beyond the $300) double to$250; after 90 days, the additional collection costs cumulate to the $250 plus the30% of the referred amount of $30,000 (= $9,000) for a total of $9,250 inadditional charges beyond the original $300 Note: Net Cash: the $9,950 = 0.65 * $30,000 (the percent of the referred amountcollected by the agency = $19,500) less the agency's charge of 30% (=$9,000 !),less the $250 accrued additional collection costs, less the 1% EXP * S of $300 Considering the NPV of the uncertain case, it can be said that the company has positive NPV, so the credit should be extended
