HM9 - c. A paying customer now represents a perpetuity of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
HM9 Chapter 19. 13. Month 3: $18,000 + (0.5 × $90,000) + (0.3 × $120,000) + (0.2 × $100,000) = $119,000 Month 4: $14,000 + (0.5   ×   $70,000) + (0.3 × $90,000) + (0.2 × $120,000) = $100,000 Chapter 20. 13. PV(COST) = 96 PV(REV) = 101/1.01 = 100 a.The expected profit from a sale is: [0.93 × ($100 – $96)] – (0.07 × $96) = –$3 The firm should not extend credit. b.At the break-even probability, expected profit equals zero: [p × ($100 – $96)] – [(1 – p) × $96] = 0 p = 0.96 So if the firm is to break even, 96% of its customers must pay their bills.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: c. A paying customer now represents a perpetuity of profits equal to: $100 $96 = $4 per month The present value is: $4/0.01 = $400 So the present value of a sale, given a 7% default rate, is: (0.93 $400) (0.07 $96) = $365.28 It clearly pays to extend credit. d.(p $400) [(1 p) $96] = 0 p = 0.194 = 19.4% So the probability of payment must be greater than 19.4% to justify extending credit....
View Full Document

This note was uploaded on 10/20/2008 for the course MGMT finance taught by Professor N/a during the Spring '08 term at Rensselaer Polytechnic Institute.

Page1 / 2

HM9 - c. A paying customer now represents a perpetuity of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online