Question

Consider the case of the Cast Iron Company. On each nondelinquent sale, Cast Iron receives revenues with a present value of $1,390 and incurs costs with a present value of $1,000. Cast Iron’s costs have increased from $1,000 to $1,240. Assuming that there is no possibility of repeat orders and that the probability of successful collection from the customer is p = 0.95, answer the following. a-1. What is the expected profit of granting credit? (Do not round intermediate calculations. Round your answer to 2 decimal places.) a-2. Should Cast Iron grant or refuse credit? 0.892 Grant b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.)

Answer 1

A) Expected Profit from granting credit = (1390*0.95)-1240

                                                                 = 80.50

B) Since expected profit is positive credit should be granted.

C) Breakeven probability of collection:

0= (1390*x)-1240

1240=1390x

x= 0.8920