Question

Question: The sales manager of Take-a-Chance Inc. is having a disagreement with the credit manager. The sal...

The sales manager of Take-a-Chance Inc. is having a disagreement with the credit manager. The sales manager wants to make a one-time sale to S. Leazy on credit. Details of the dale are as follows:

Selling Price: $4,400,000

Cost of Product sold: $2,400,000

Credit Terms: Net 60

Required rate of return: 18% annually

Probability of collection: 60% (S. Leazy will either pay on time or not at all)

Should Take-a-chance Inc. make the sale? what is the expected NPV?

Show all calculations.

Credit Terms: Net 60 (due in 60 days. No discounts

Answer 1

Chance of payment on time that is in 60 days is 60%. Since selling price is $44,00,000, there is a 40% chance that payment will not be made on time.

Expected collection = 4400000*60%+0*40%=$2640000

Cost of product sold = $2400000 which means if sale is made there will be surplus received if collection is made on time.

So, Take-a-chance should make the sale.

Required return = 18% annually that is 18/6=3% for 60 days assuming 360 days in a year.

Expected NPV = $(2640000/1.03-2400000)

=$163106.8.