Question

Assume that an MNC operating in China currently sells 1,500 units of a product each month at a price in yuans (CNY) of 4,000 and has a profit margin of 20 percent. Currently the customers take cash delivery. The firm is considering a new pricing structure that requires customers to choose between cash discounts and credit. The firm wants to offer a price of CNY 4,100 with a “ 3/ 15 net 60” deal. The firm estimates that its sales would increase by 15 percent and that half of its customers would take the cash discount option. The firm faces a discount rate of 10 percent for CNY cash flows (annual compounding). What is the NPV of selling 1, 725 units under the proposed discount/ credit terms) if you consider that 5 percent of credit takers default?

Answer 1

Current price (CNY Profit margin e current Profie (CNM Profe merein x Current price Current sales per month fult payment in 60 customors takins the naw atructue with 1596 inc rฉ.au in aal.a, sal-s per moth incredau to ī,750 (as gsen in the question) Profit markin x Current price x sales per month S096 tole new structurw, 5% of them default 17.0% (Discount giver, of 3% subtracted from stated profit margin> since" 5% of the ρeoole who tak騥the n-w structure default sales per manth under the new structure ot" be ste et a,s 831 (rounded down) So, profit from new structure- Total profie-