Your company is evaluating a switch from a cash policy to a net 30 policy. The price per unit is $49, and the variable cost per unit is $20. The company currently sells 100 units per month. Under the proposed policy, the company expects to sell 110 units per month. The required monthly return is 2%.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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  1. Your company is evaluating a switch from a cash policy to a net 30 policy. The price per unit is $49, and the variable cost per unit is $20. The company currently sells 100 units per month. Under the proposed policy, the company expects to sell 110 units per month. The required monthly return is 2%.

a-What is the effective annualized rate for this “loan” triggered by the credit policy?

2. Your company is evaluating a switch from a cash policy to a net 30 policy. The price
per unit is $49, and the variable cost per unit is $20. The company currently sells 100
units per month. Under the proposed policy, the company expects to sell 110 units
per month. The required monthly return is 2%.
a) What is the NPV of the switch?
Part 1:
Incremental cash flow = (P – V)(S' – 5)
Incremental cash flow = ($49 – $20)($110 – 100)
Incremental cash flow = $29 * $10 = $290
t 2:
Incremental cash flow
Cost of capital
Incremental cash flow
Incremental cash flow =02
$290
= $14500
Part 3:
Switch Cost = (P + S) + V(S' – 5)
Switch cost = ($49 + 100) + $20($110 – $100)
Switch cost = $4900 + $200 = $5100
Therefore:
NPV of Switch = $14500 – $5100 = $9400
Transcribed Image Text:2. Your company is evaluating a switch from a cash policy to a net 30 policy. The price per unit is $49, and the variable cost per unit is $20. The company currently sells 100 units per month. Under the proposed policy, the company expects to sell 110 units per month. The required monthly return is 2%. a) What is the NPV of the switch? Part 1: Incremental cash flow = (P – V)(S' – 5) Incremental cash flow = ($49 – $20)($110 – 100) Incremental cash flow = $29 * $10 = $290 t 2: Incremental cash flow Cost of capital Incremental cash flow Incremental cash flow =02 $290 = $14500 Part 3: Switch Cost = (P + S) + V(S' – 5) Switch cost = ($49 + 100) + $20($110 – $100) Switch cost = $4900 + $200 = $5100 Therefore: NPV of Switch = $14500 – $5100 = $9400
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