Question

Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit. The firm believes it can increase its sales by an additional 40 units if it switches to a net 30 credit policy. The monthly interest rate is 0.5 percent and the variable cost per unit is $480. What is the net present value of the proposed credit policy switch

Answer 1

$1,768,680

Explanation:

Given that:

• Number of units: 280
• Price per unit: $729
• The monthly interest rate: 0.5 % = 0.005
• Number of additional units: 40
• The variable cost per unit: $480

The net present value of the proposed credit policy switch as the following formula:

NPV = -[Number of units*price/unit) + (Number of additional units*Variable cost/unit) + (price/unit - Variable cost/unit)*Number of additional units] / Rate

NPV = - [($729*280) + ($480*40)] + [($729 - $480) 40]/0.005 = $1,768,680

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