Question

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

Answer #1

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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round intermediate calculations and round your answer to 2 decimal
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New Policy
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Leeloo, Inc., is considering a change in its cash-only sales
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Current Policy
New Policy
Price per unit
$
760
$
760
Cost per unit
$
555
$
555
Unit sales per month
820
870
Calculate the NPV of the decision to switch. (Do not
round intermediate calculations and round your answer to 2 decimal...

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The Snedecker Corporation is considering a change in its
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Current Policy
New Policy
Price per unit
$
84
$
86
Cost per unit
$
44
$
44
Unit sales per month
4,100
?
What is the break-even quantity for the new credit policy?
(Do not round intermediate calculations and round your
answer to 2 decimal places, e.g., 32.16.)

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required return is 2 percent per period.
Current Policy
New Policy
Price per unit
$
68
$
70
Cost per unit
$
36
$
36
Unit sales per
month
2,900
?
What is the break-even quantity
for the new credit policy? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
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Break-even
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New Policy
Price per unit
$
56
?
Cost per unit
$
32
$...

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New Policy
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