Question

Sanchez, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. The required return is .82 percent per month. Current Policy New Policy Price per unit $ 960 $ 960 Cost per unit $ 765 $ 765 Unit sales per month 1,020 1,100 Calculate the NPV of the decision to switch. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Cost of Switching = Cost of Lost Sales + Incremental Variable Costs
Cost of Switching = ($960 * 1,020) + $765 * (1,100 – 1,020)
Cost of Switching = $979,200 + $61,200
Cost of Switching = $1,040,400

Benefit of Switching = (Unit Sales – Unit Variable Cost)* Incremental Units sold
Benefit of Switching = ($960 - $765) * (1,100 – 1,020)
Benefit of Switching = $15,600

NPV of decision = -$1,040,400 + ($15,600 / 0.0082)
NPV of decision = -$1,040,400 + $1,902,439.02
NPV of decision = $862,039.02