Question
Locust Software sells computer training packages to its business customers at a price of $102. The cost of production (in present value terms) is $95.
Locust Software sells computer training packages to its business customers at a price of $102. The cost of production (in present value terms) is $95. Locust sells its packages on terms of net 30 and estimates that about 6% of all orders will be uncollectible. An order comes in for 10 units. The interest rate is 2.0% per month.
a-1. Should the firm extend credit if this is a one-time order?
a-2. Calculate the profit or loss if this is a one-time order and sale will not be made unless credit is extended. (Do not round intermediate calculations. Round your answer to 2 decimal places. Enter the value answer as a positive number.)
b. What is the break-even probability of collection? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c-1. Now suppose that if the customer pays this month's bill, they will place an identical order in each month indefinitely and can be safely assumed to pose no risk of default.Calculate the present value of the sale. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c-2. Should credit be extended?
d. What is the break-even probability of collection in the repeat-sales case? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
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