Question
Nike sells shoes to its business customers at a price of $101. The cost of production (in present value terms) is $96. Nike sells its
Nike sells shoes to its business customers at a price of $101. The cost of production (in present value terms) is $96. Nike sells its shoes on terms of net 30 and estimates that about 5% of all orders will be uncollectible. An order comes in for 20 units. The interest rate is 2% per month. Suppose that if a customer pays this months bill, it will place an identical order in each month indefinitely and can be safely assumed to pose no risk of default. Should credit be extended? What is the break-even probability of collection in the repeat-sales case?
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