Question

Sanchez, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. The required return is 76 percent per month. Price per unit Cost per unit Unit sales per month Current Policy $ 900 $ 690 960 New Policy $ 900 $ 690 1,040 Calculate the NPV of the decision to switch. (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV

Answer 1

The cost of switching to the new policy will be the sales foregone out of the first policy, and cost of producing incremental units under the new policy. Calculate this cost as follows: Total cost of switch = Sales foregone+Incremental cost of additional units =($900 x 960)+(1,040 - 960) $690 = $864,000+ $55,200 = $919,200 Now, the monthly benefit received due to the switch is the profit out of incremental units sold. Calculate this monthly benefit as follows: Monthly benefit =(1,040 - 960)x($900 - $690) = 80 x $210 = $16,800 This monthly benefit will actually go on for perpetuity. Calculate the NPV of this switch as follows: NPV = Initial cost + PV of future benefit =-$919.200 - $16,800 0.76% =-$919,200 +$2, 210, 526.32 = $1,291,326.32