Question

Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $3 million per unit, and the credit price is $3.305 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 250 such orders is never collected. The required return is 3.6 percent per period. The customer will not buy if credit is not extended.

  

a.	What is the NPV per engine purchased on credit? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
b.	What is the break-even probability of default in part (a)? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c-1.	Suppose that customers who don’t default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. What is the NPV per engine purchased on credit? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
c-2.	Assuming the customer becomes a repeat customer, what is the break-even probability of default? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

    

Answer 1

a) NPV $ 177,393.82 --3000000+3305000*(1-0.004)/1.036 b) Break-even probability 5.96% =1-3000000*1.036/3305000 C-1) NPV IS 5,438,333 =-3000000+(3305000-3000000)*(1-0.004)/0.036 c-2) Break-even probability 64.59%)=1-3000000*0.036/(3305000-3000000)

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