Question

CJ Stores has current cash-only sales of 218 units per month at a price of $236.55 a unit. If it switches to a net 30 credit policy, the credit sales price will be $249 while the cash price will remain at $236.55. The switch is not expected to affect the sales quantity but a 3 percent default rate is expected. The monthly interest rate is 1.4 percent. What is the net present value of the proposed credit policy switch?

a. 24,727

b. 27,965

c. 26,893

d. 29,481

e. 25,978

Answer 1

Answer:

e. 25,978

Calculation

Sales in units = 218 units per month

Sales price per unit = 236.55

After net 30 credit policy:

Sales price per unit = 249

Default rate = 3%

Monthly interest rate =1.4 %

So first we need to calculate the difference % of the sales price (d) = (Credit sales price - Cash sales price )/Credit sales price

That is, (249 - 236.55) / 249 = 0.05

Now we can calculate the net present value of the proposed credit policy switch:

NPV =  -( Cash sales price * No. of units) + (Credit sales price * No. of units) * (Variance rate - Default rate)/Monthly interest rate

That is, = -(236.55* 218 )+(249 * 218 )*(0.05 - 0.03)/0.014 = 25,977.8

So the NPV = 25,978 (Rounded)