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Maxwell Corporation has a customer who wants to purchase $60,000 of goods on credit. Maxwell estimates...

Maxwell Corporation has a customer who wants to purchase $60,000 of goods on credit. Maxwell estimates that the customer has a 97% probability of paying the $50,000 in 4 months and a 3% probability of a complete default (paying no cash at all). Assume an investment of 85% of the amount of the sale and a required return of 10% APY. What is the NPV of granting credit?

Group of answer choices

about $4,483.37

about $5,380.05

about $5,829.63

about $45,938.17

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Answer #1

NPV = expected present value of cash inflows - present value of cash outflow.

Present value = future value / (1 + discount rate)t, where t = time in years.

Expected present value of cash inflows = probability weighted present value of cash inflows.

Expected present value of cash inflows = (97% * ($60,000 / (1 + 10%)4/12)) + (3% * $0)

Expected present value of cash inflows = $56,380.05.

Present value of cash outflows = 85% of sale = 85% of $60,000 = $51,000.

NPV =  $56,380.05 - $51,000 = $5,380.05.

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