Question

22)company is considering switching from a cash only policy to a net 30 credit policy. The price per unit is $500 and the variable cost per unit is $400. The company currently sells 1,200 units per month. Under the proposed policy the company expects to sell 1,300 units per month. The required monthly return is 1%. If you were using NPV analysis to decide whether the company should switch to the net 30 credit policy, what amount would you use for the present value of the future incremental cash flows?

Answer 1

Answer>

Since we are using NPV analysis,

NPV = PV of all cash outflows - PV of all cash inflows

Present value for the cash flow in nth month = PV = CF/(1+r)^n

Where,

CF = Cash flow

r = required rate of return monthly = 1%

n = month

Amount used for the PV of future incremental cash flows = PV of cash flows received from sale of 1300 units - Pv of cash flows received from the sale of 1200 units

= (1300*500)/(1+0.01)^1 - (1200*500)/1

= 650000/1.01 - 600000

= 643564.36 - 600000

= 43564.36

Hence the PV of future incremental cash flows is = 43,564.36