Question

# Devour, Inc., is considering a change in its cash-only sales policy. The new terms of sale...

 Devour, 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 1.2 percent per month.

 Current Policy New Policy Price per unit \$700 \$700 Cost per unit \$455 \$455 Unit sales per month 980 1,050

 Required : Based on the above information, determine the NPV of the new policy.

rev: 09_21_2012

\$1,171,916.67

\$1,372,000.00

\$711,316.67

\$739,769.33

\$3,365,483.33

The cost of switching is the lost sales from the existing policy plus the incremental variable costs under the new policy, so:

Cost of switching = \$700(980) + \$455(1,050 – 980) = \$686,000 + \$31,850 = \$717,850

The benefit of switching is the new sales price minus the variable costs per unit, times the incremental units sold, so:

Benefit of switching = (\$700 – \$455)(1,050 – 980) = \$245 x 70 = \$17,150

The benefit of switching is a perpetuity, so the NPV of the decision to switch is:

NPV = –\$717,850 + [\$17,150/0.012] = -\$717,850 + \$1,429,166.67 = \$711,316.67

Hence, Option "C" is correct.

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