Answers to Chapter Review and Self Test Problems

21.1 If the switch is made, an extra 100 units per period will be sold at a gross profit of $175 - 130 = $45 each. The total benefit is thus $45 X 100 = $4,500 per period. At 2.0 percent per period forever, the PV is $4,500/.02 = $225,000.

The cost of the switch is equal to this period's revenue of $175 X 1,000 units = $175,000 plus the cost of producing the extra 100 units, 100 X $130 = $13,000. The total cost is thus $188,000, and the NPV is $225,000 - 188,000 = $37,000. The switch should be made.

21.2 If the customer pays in 30 days, then you will collect $22 X 1,000 = $22,000. There's only an 85 percent chance of collecting this; so you expect to get $22,000 X .85 = $18,700 in 30 days. The present value of this is $18,700/1.03 = $18,155.34. Your cost is $15 X 1,000 = $15,000; so the NPV is $18,155.34 - 15,000 = $3,155.34. Credit should be extended.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

21. Credit and Inventory Management

© The McGraw-Hill Companies, 2002

CHAPTER 21 Credit and Inventory Management

Prosperity Pursuit

Prosperity Pursuit

Those who truly want to attain a financially free mindset, have only to set their minds on it, and acquire the proper means, as they do in relation to any other aim which they want to achieve, and it can be easily done.

Get My Free Ebook


Post a comment