Question

A seller of luxury boats that retail for an average of $200,000 offers cash discount terms of 1/10 net 30. The net present value (NPV) of these terms is -$696. Assume an annual opportunity cost of 12%. If the seller adopted 1/20 net 30 terms, what would the NPV be? (Rounded to the nearest whole dollar) Should the seller adopt these terms?

Answer 1

The NPV of the 1/20 net 30 terms would be -$16,071. The seller should not adopt these terms as the NPV is negative, indicating a loss. The seller would be better off sticking with the 1/10 net 30 terms, which have a higher NPV of -$696.

Step-by-step explanation:

The Net Present Value (NPV) can be calculated using the formula:

NPV = Cash Flow / (1+r)^n

Where:

• Cash Flow refers to the cash received or paid out
• r is the discount rate, which represents the opportunity cost of investing in a project
• n is the time period over which the cash flows occur

The NPV of the 1/10 net 30 cash discount terms is -$696. To calculate the NPV of the 1/20 net 30 terms, we need to determine the cash flow and the appropriate discount rate.

Assuming an annual opportunity cost of 12% and an average retail price of $200,000 for the luxury boats, the cash flow for the 1/20 net 30 terms would be:

Cash Flow = $200,000 * (1 - 1/20) = $190,000

Using the NPV formula:

NPV = $190,000 / (1+0.12)^1 - $200,000

NPV = -$16,071

The NPV of the 1/20 net 30 terms is -$16,071. The seller should not adopt these terms as the NPV is negative, indicating a loss. The seller would be better off sticking with the 1/10 net 30 terms, which have a higher NPV of -$696.