Question

Sanchez, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. The required return is .95 percent per month. Current Policy New Policy Price per unit $ 540 $ 540 Cost per unit $ 395 $ 395 Unit sales per month 1,080 1,130

Calculate the NPV of the decision to switch.

Answer 1

The cost of switching is the lost sales from the existing policy plus the incremental variable costs under the new policy, so:

Cost of switching = $540(1,080) + $395(1,130 - 1,080) = $583,200 + $19,750 = $602,950

The benefit of switching is the new sales price minus the variable costs per unit, times the incremental units sold, so:

Benefit of switching = ($540 - $395)(1,130 - 1,080) = $145 x 50 = $7,250

The benefit of switching is a perpetuity, so the NPV of the decision to switch is:

NPV = -$602,950 + $7,250/0.0095

= -$602,950 + $763,157.89 = $160,207.89