Question

You are planning on selling a new product that has a variable cost of $62 a unit. Your monthly required return is 1.8 percent. To help boost your sales, you plan to offer new customers one month to pay. You expect that of 100 customers who purchase the product today, all will take advantage of the credit offer. However, 12 of them will not pay one month from now, while 88 will be so happy with the product that they, and their offspring, will purchase replacement products and pay for them on a monthly credit basis forever. The selling price and variable cost will not change and the variable cost will be incurred at the time of sale.

Required: What is the minimum price the firm could charge to break-even on an Net Present Value basis?

Answer 1

We can solve it like this

Here let say the price will be X which a firm should charge for break even. Then in first month he will only bear the cost of $6200 ( $62x100) and the money he will receive in next month will be 88X because 12 are not paying. Also required rate of return is 1.8% monthly.

So basically He wants

$6200 = (88X) divided by ( 1 + 0.018)

which will give 71.72 approx or you can say he should put price minimum 72 so that he will at break even point

here i am not sure that this question is asking for perpetual earning or not.

so i am giving answer on the basis of repeatation of monthly sales in fixed manner.

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