Asked by Yating Zhong on May 01, 2024
Verified
You are considering a temporary opening of a kiosk in the local mall. Any sale you make will be a one-time sale. There is only a 45 percent chance that you will collect your money on a credit sale. The product you want to sell has a variable cost of $4.10 and a sales price of $5.75. The monthly interest rate is 1.3 percent. Should you offer people 30 days to pay? Why or why not?
A) Yes; because you will earn $2.23 on every credit sale you make.
B) Yes; because you will earn $5.68 on every credit sale you make.
C) No; because the net present value of the potential sale is -$1.55.
D) No; because the net present value of the potential sale is -$.98.
E) It doesn't matter; because the present value of the potential sale is $0.
Net Present Value
is a method used in capital budgeting to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.
Credit Sale
A transaction where the buyer is allowed to pay for goods or services at a later date, as opposed to paying at the time of sale.
Monthly Interest Rate
The interest rate applied to a loan or investment, calculated to reflect the monthly compounding period.
- Comprehend the notion of net present value (NPV) as it applies to credit sales transactions.
Verified Answer
DJ
Dylan JacobMay 08, 2024
Final Answer :
D
Explanation :
The net present value (NPV) of a potential sale can be calculated by considering the probability of collecting the money, the sales price, the variable cost, and the monthly interest rate. Given a 45% chance of collecting on a credit sale, a sales price of $5.75, a variable cost of $4.10, and a monthly interest rate of 1.3%, the expected profit per sale is reduced by the risk of not collecting and the cost of financing the credit sale. The correct calculation should account for these factors, leading to a negative NPV, indicating that the expected value of offering credit is less than the cost, making option D the correct choice.
Learning Objectives
- Comprehend the notion of net present value (NPV) as it applies to credit sales transactions.