Final answer:
To calculate the NPV of the credit policy, compare the cash flows with and without the policy. Subtract costs from revenue to get net cash flows, then discount them at the required rate of return to find the present value. If the NPV is positive, offer credit.
Step-by-step explanation:
In order to calculate the net present value (NPV) of the credit policy, we need to compare the cash flows with and without the credit policy.
First, we need to determine the cash flows with the credit policy. This includes the additional sales revenue generated from offering credit, as well as any additional costs such as bad debts and administrative expenses. Subtract the costs from the revenue to get the net cash flows.
Next, discount the net cash flows at the required rate of return (3.0%) to find the present value of the cash flows with the credit policy.
Finally, compare the present value of the cash flows with the credit policy to the present value of the cash flows without the credit policy. If the NPV is positive, then the firm should offer credit to its customers.