Question

Read the question carefully, make sure to answer all questions are answered and show your work and please type the answer.

4. A credit analyst has received a $20,000 order from a new customer. The cost of filling the order (i.e., COGS) is $19,100 and collection costs are $500. The credit analyst notes that the COGS will be paid immediately. Further, it is assumed that the customer will repay the trade credit obligation in 90 days. It is also assumed that the collection costs will be incurred in 90 days. If the appropriate discount rate is 10%, what is the NPV of extending credit to the new customer?

A. $400.00 B. -$157.25 C. $69.25 D. -$69.25

Answer 1

Sales Value = $20,000

COGS = $19,100

Collection Cost = $500

Discount Rate = 10% p.a.

Time = 90 Days

Applicable Discount Rate =

Applicable Discount Rate = = 0.0247 i.e. 2.47%

NPV of extending credit to customer =

NPV of extending credit to customer =

NPV of extending credit to customer = - $69.25

Thus, Option (D) is correct.