Question

CJ Stores has current cash-only sales of 218 units per month at a price of $236.55 a unit. If it switches to a net 30 credit policy, the credit sales price will be $249 while the cash price will remain at $236.55. The switch is not expected to affect the sales quantity but a 3 percent default rate is expected. The monthly interest rate is 1.4 percent. What is the net present value of the proposed credit policy switch? Multiple Choice O $26,893 $27,965 O $24,727 O

Answer 1

Qty (Q) = 218units
Price (P) = $236.55
New Price (P') = $249
New Qty (Q') = 218units (no change in qty)
default rate = 3% (0.03)
Interest rate = 1.4% (0.014)

Difference = (P' - P/ P') = (249 - 236.55/249) = 0.05

NPV = -(P*Q) + {(P' * Q') * (difference - default rate / interest rate)}
= -(218*236.55) + {(218*249) * (0.05 - 0.03/ 0.014)}
= -(51567.9) + {(54282) * (0.02/0.014)}
  = -(51567.9) + {(54282 * 1.428571){
= -51567.9 + 77545.7143
= $25,977.8 (round off to $25,978)