On each nondelinquent sale Cast Iron receives revenues with a present value of $

Question

On each nondelinquent sale Cast Iron receives revenues with a present value of $1,310 and incurs costs with a present value of $1,160. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .95. a-1. What is the expected profit of granting credit? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected profit $ per sale a-2. Should Cast Iron grant or refuse credit? Grant Refuse b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.) Break-even probability %

Explanation / Answer

a-1.

Expected profit from granting credit = ($1,310 - $1,160)*0.95 -($1,160 * 0.05) = $142.50 - $58 = $84.50

a-2

At the breakeven point of collection, expected profit is zero. Let the breakeven probability of collection is p.

p*($1,310 - $1,160) - (1-p)$1,160 = 0

$150p - $1,160 + $1,160P = 0

$1,310p = $1,160

p = $1,160/$1,310 = 0.8855 = 88.55%

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