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 and the probability of default is 10 percent. Assume the number of repeat customers is affected by the defaults. In other words, 25 percent of the customers who do not default are expected to be repeat customers.

  

Calculate the NPV of the decision to grant credit. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Calculation of NPV:

Repeat customers = 100 * 25% = 25 units

Non repeat customers = 100 - 25 = 75 units

Present value of repeat orders = (25 * ($10,000 - $8,200)) / 0.011 = $4,090,909.09

Present value of sales from non - receipt customers = (75 * $10,000) / (1 + 0.011) = $750,000 / 1.011 = $741,839.7626

Initial outflow = 100 * $8,200 = $820,000.

Net present value = (Present value of repeat orders + Present value of sales from non - repeat orders) - Initial outflow
= ($4,090,909.09 + $741,839.7626) - $820,000
= $4,012,748.85

Net present value = $4,012,748.85