Question

X company is selling buttons for 50 dollars, each button costs 40 dollars. with 25% chance...

X company is selling buttons for 50 dollars, each button costs 40 dollars. with 25% chance they will fail next year. they order 1.000 bottoms with an 6 month credit. should we accept the order ? discount rate is 10% each year.

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Answer #1
PARTICULARS $ $
SELLING RATE 50
COST 40
PROFIT 10
PROBABILTY TO FAIL 25%
PROBABILTY TO WIN 75%
NUMBER OF BUTTONS ORDERED 1000
TOTAL PROFIT 10000
PROBABILITY TO WIN 75%
EXPECTED PROFIT 10000*75% 7500
PRESNT VALUE FACTOR IS 10%
CREDIT 6 MONTH ( HALF YEAR)
SO PV FACTOR IS 10/2 5%
PV FACTOR 5% 0.952
PV VALUE OF PROFIT .952*7500 7140
CONCLUSION
IT SHOWS A POSITIVE NPV OF $ 7140 THE ORDER SHOULD BE ACCEPTABLE
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