Question

A company is assessing granting credit to a new customer. The variable cost per unit is $88, the current price is $115, the probability of default is 34% and the monthly required return is 4.0%. Calculate the NPV of the switch. Assume the customer will purchase once.

Answer 1

The Net Present Value (NPV) of the switch can be calculated using the formula: NPV = (Price per unit - Variable cost per unit) * Probability of default.

Step-by-step explanation:

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

NPV = (Price per unit - Variable cost per unit) * Probability of default

Given that the variable cost per unit is $88, the current price is $115, and the probability of default is 34%,

NPV = ($115 - $88) * 0.34

NPV = $9.18

Therefore, the NPV of the switch is $9.18.