Question

Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 100 units have been made by customers requesting credit. The variable cost is $8,200 per unit, and the credit price is $10,000 each. Credit is extended for one period. The required return is 1.1 percent per period. If Solar Engines extends credit, it expects that 25 percent of the customers will be repeat customers and place the same order every period forever and the remaining customers will be one-time orders.

    

Calculate the NPV of the decision to grant credit? (Show your work)

Answer 1

Calculation of NPV

NPV = Present value of cash flow - Initial cash outlay

=[ (1-.25)*100*10,000/1.011] + [.25*100*(10,000-8200)/.011] -[ 8200*100]

=741839.76+4090909.09-820,000

=4012748.85

NOTE -

1.Cash outlay is total variable cost

2. Since the orders can be one-time or perpetual, the NPV of the decision is the weighted average of the two potential sales streams. The initial cost is the cost for all of the engines