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 $1,270 and incurs costs with a present value of $1,120. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .96.

a. 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

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

PV of Revenue                  1,270 a PV of costs                  1,120 Expected Profit                       150 When expected collection probability=0.96 Then Expected collection =1270*0.96=                  1,219 PV of costs                 (1,120) Expected profit of granting credit = $             99.20 b For Break even , the expected collection =                  1,120 Break even probability =1120/1270=                    0.88 So Break even probability =0.88

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