Question

A customer presently buys $500,000/month from your firm. It has promised to increase sales by 10% if you offer it 90-day terms (you presently extend 30-day terms). Your firm's opportunity cost is 8%.

1. What is the NPV of a single sale with the present arrangement ($500,000/month)? (a.) $42,672 (b.) $496,734 (c.) $6,394,013 (d.) $539,360

2. What is the impact on NPV for a single sale if the new proposal is accepted? (a.) $42,672 (b.) $496,734 (c.) $6,394,013 (d.) $539,360

3. If the change is permanent, what is the aggregate impact on NPV? (a.) $42,672 (b.) $496,734 (c.) $6,394,013 (d.) $539,360

4. Should the firm aggree to the change? (a.) No, because NPV is higher (b.) Yes, because NPV is higher (c.) Yes, because NPV is lower (c.) No, because NPV is lower

Answer 1

1. What is the NPV of a single sale with the present arrangement ($500,000/month)?

     Answer: Present Value of sales = 5,00,000/1.006575

           = $4,96,734

So Correct answer is Option-(b) : $4,96,734

2. What is the impact on NPV for a single sale if the new proposal is accepted?

Answer: New Sales = $550,000

Present Value of New Sales = 550,000/1.019726

            = $5,39,360

So Correct answer is Option-(d) : $5,39,360

3. If the change is permanent, what is the aggregate impact on NPV?

Answer:

If the change is permanent, the aggregate impact on NPV = $5,39,360 - $4,96,734

= $42,626

So Correct answer is Option-(a) : $42,672

4. Should the firm aggree to the change?

Answer:

Yes, because NPV is higher

So Correct answer is Option-( (b.) Yes, because NPV is higher