Question
Your company is considering changing the terms of its credit from net 30 to 4/10/net 30. Currently the price per unit is $100. Its variable
Your company is considering changing the terms of its credit from net 30 to 4/10/net 30. Currently the price per unit is $100. Its variable cost is $40 and the quantity sold is 1,000 units. With the new credit terms the price will be increased to 104.18 (P). Variable costs (V) will rise to $40.10. The sales are expected to increase by 50 units. And the expected default rate is the industry average 5%. The 30-day discount rate, R*, is 1.50%, meaning use 1.50% in your calculations.
1. Calculate the NPV for the new terms based on expected units sold at new price and new variable costs? Should the change be made?
2. Assume the actual units sold are 1,035 instead of anticipated 1,050. Calculate the actual NPV of the credit policy change. Would the policy still be a good idea? Why or Why not?
3. Assume you can make one of the three following changes and keep the units at 1,035.
When calculating NPV for each, assume original problem values for P, V, Q, , R* and make changes only in variables for the alternative scenarios.
a. Raise price (P) to $104.80, meaning increase the discount to 4.58%.
b. Not change price and lower variable costs V from $40.10 to $39.50
c. Raise price (P) to $104.25 and lower V from $40.10 to $39.57
Calculate the NPV for each of the three choices and make a recommendation?
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