You may attempt this question 3 more times for credit. Crisps has received an or

ID: 2619795 • Letter: Y

Question

You may attempt this question 3 more times for credit. Crisps has received an order for 14500 bags of potato chips from BigBag. Crisps views BigBag to be a long-term customer and believes they will continue to place the same order year after year forever. Crisps sells its large bags of potato chips for $1.90 each, and calculates its internal cost for the product at $1.45 each. Market research estimates that there is a 37% chance that BigBag will pay in full what it owes. Crisps uses a discount rate of 6.35% for all NPV analysis. Based on this information, calculate the NPV of this credit decision? Place your answer to the nearest dollar. Do not use a Dollar sign or commas within your answer.

Explanation / Answer

value of sale

14500*1.9

27550

value of internal cost

14500*1.45

21025

amount of full recovery with 37% chance

27750*37%

10193.5

Present value of amount of recovery for forever = amount of recovery/discount rate = 10193.5/.0635

10193.5/.0635

160527.6

NPV of credit decision

-21025+160527.6

139503