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 $1,380 and incurs costs with a present value of $1,230. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .85.

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.)

On each nondelinquent sale Cast Iron receives revenues with a present value of $1,380 and incurs costs with a present value of $1,230. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .85.

Explanation / Answer

(a-1) Present Value of Cost = $1,230

Total Present Value of Revenue = ($1,380*0.85) + ($0*0.15) = $1,173

Net Present Value = $1,173 - $1,230 = - $ 57

a-2

As the net present value is Neative, Cast Iron should Refuse Credit

(b) Break Even probability of collection = $1,230 / $1,380 = 89.13%

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