You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect that there is a 40 percent chance that this person will never pay you. The sales price of the item the customer wants to buy is $249. Your variable cost on that item is $174 and your monthly interest rate is 1.5 percent. Should you grant credit to this customer? Why or why not?

A) Yes; because the net present value of the potential sale is $75.
B) Yes; because the net present value of the potential sale is $249.
C) No; because the net present value of the potential sale is -$27.
D) No; because the net present value of the potential sale is -$174.
E) It doesn't matter; because the NPV of the potential sale is zero.

Question

Niamh Hughes · Accepted Answer

Final Answer : C, Explanation :  To determine whether to grant credit, calculate the expected net present value (NPV) of the sale. The expected value of the sale is the sales price ($249) times the probability of payment (60%) plus the variable cost ($174) times the probability of non-payment (40%), adjusted for the monthly interest rate (1.5%). The calculation is as follows: Expected NPV = (0.6 * $249) - (0.4 * $174) - ($249 * 0.015). This results in a negative value, indicating that the expected outcome of the sale is a loss, hence the decision should be not to grant credit.

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