Question

The firm is considering a proposal to extend credit to a new customer. The order total is $200,000. The contribution margin on the order is 12%. The probability of the payment is 87%. The required return on proposed transaction is 16%. Assume the company will incur one half the costs associated with the order at the time it accepts the order, and the other half at the time of delivery, 30 days later. Payment is due 30 days after delivery.

1. What are the expected cash in- and outflows from this order?

2. What is the expected net present value of this order?

3. Will the company accept this order?

Answer 1

Cash outflow - Now $ 88,000.00 -200000*(1-12%)/2 $ 88,000.00 =200000*(1-12%)/2 Cash outflow- after 30 days b) Cash inflow - after 60 days $ 174,000.00 -200000*87% Rate for 60 days Rate for 30 days 2.67% = 16%*(60/360) 1.33% -16%*(30/360) PV cash inflows Less: PV cash outflows 169,475.02 =174000/(1+2.67%) 174,844.96 =88000+88000/(1+1.33%) Net present value $5,369.94 d) NPV < $0. It should reject proect.

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