The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 700 bicycles. Silver Spokes will receive revenues with a present value of $1000 for each bicycle and will incur costs with a present value of $650 for each bicycle.

a. What is the break-even probability of collection? What is the break-even probability of default? Draw the credit decision tree.

b. If the Silver Spokes Bicycle Shop offers terms of 2/10, net 60. What effective annual interest rate does the shop earn when a customer does not take the discount? Each bicycle sells for $1000.

c. If a customer can borrow money against their line of credit at an interest rate of 12% per annum compounded monthly, what should the customer do?