By loosening its credit standards, the CFO of the Henleigh Company believes she can increase the...
By loosening its credit standards, the CFO of the Henleigh Company believes she can increase the net present value of the firm’s daily cash flows by $10,000. If the increased daily NPV continues indefinitely, what is the aggregate net present value of the decision to lessen the credit standards? Assume a 365-day year. Henry uses a 8% cost of capital for credit policy decisions.
Homework Answers
IT IS A CASE OF PERPETUITY.
PRESENT VALUE = ANNUAL AMOUNT/ RATE
BUT AS AMOUNT IS GIVEN IN DAILY TERMS, WE HAVE TO CONVERT IN DAILY TERMS
PRESENT VALUE = DAILY AMOUNT/DAILY RATE
DAILY AMOUNT = 10000, DAILY RATE = 8%/365 = 0.08/365
PRESENT VALUE = DAILY AMOUNT/DAILY RATE = 10000/ (0.08/365) = 45,625,000
ANSWER : $45,625,000 (Thumbs up please)
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