Surf City sells its network browsing software for $31 per copy to computer software distributors and allows its customers 1 month to pay their bills. The cost of the software is $18 per copy. The industry is very new and unsettled, however, and the probability that a new customer granted credit will go bankrupt within the next month is 25%. The firm is considering switching to a cash-on-delivery credit policy to reduce its exposure to defaults on trade credit. The discount rate is 1% per month. Required: a-1. What is the present value of the expected profit under the current credit policy? a-2. What is the expected profit under the cash-on-delivery policy? If the firm switches policies, sales will fall by 50%. b-1. What would be the present value of the expected profit if a customer that is granted credit and pays its bills can be expected to generate repeat orders with negligible likelihood of default for each of the next 6 months? Similarly, customers that pay cash also will generate on average 6 months of repeat sales. b-2. What would be the present value of the expected profits under the cash-on-delivery policy, given the sales information from (b-1)? Complete this question by entering your answers in the tabs below. Reg A1 and A2 Req B1 and B2 a-1. What is the present value of the expected profit under the current credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) a-2. What is the expected profit under the cash-on-delivery policy? If the firm switches policies, sales will fall by 50%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Show less a-1 Present value of expected profit Present value of expected profit la-2. Req A1 and A2 Req B1 and B2 b-1. What would be the present value of the expected profit if a customer that is granted credit and pays its bills can be expected to generate repeat orders with negligible likelihood of default for each of the next 6 months? Similarly, customers that pay cash also will generate on average 6 months of repeat sales. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. What would be the present value of the expected profits under the cash-on-delivery policy, given the sales information from (b-1)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Show less b-1. Present value of expected profit b-2. Present value of expected profit Req A1 and A2 Req B1 and B2 b-1. What would be the present value of the expected profit if a customer that is granted credit and pays its bills can be expected to generate repeat orders with negligible likelihood of default for each of the next 6 months? Similarly, customers that pay cash also will generate on average 6 months of repeat sales. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. What would be the present value of the expected profits under the cash-on-delivery policy, given the sales information from (b-1)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Show less b-1. Present value of expected profit b-2. Present value of expected profit
