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Valuation (NPV) Approach

# Valuation (NPV) Approach - Valuation(NPV Approach Back to...

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Valuation (NPV) Approach 1 Back to the decision… Firm XYZ is considering modifying its credit terms from net 30 to net 60. Relaxing the credit terms and giving customers more time to pay is expected to increase sales. The Valuation Approach (NPV) compares the cash flows ( amount and timing ) of a

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Firm XYZ’s Decision 2 Present sales data: \$36,500,000 annual sales \$36,500,000 / 365 = \$100,000 / day Cash Flow Timeline (net 30) First, let’s obse rve the timeli ne base d on the curre 0 30 Days \$100,000 PV = \$100,000 1 + (.10 х 30 / 365 ) PV = \$99,184.78 FV 1 + ( i х n ) PV = This is a DAILY NPV…it recurs every day.
Firm XYZ’s Decision 3 Sales: \$36,500,000 \$36,500,000 / 365 = \$100,000 / day Cash Flow Timeline (net 60) Now assu me the propo sed net 60 is adopt 0 30 60 Days \$0 \$100,000 PV = \$100,000 1 + (.10 х 60 / 365 ) PV = \$98,382.75 Without a corresponding increase in sales, the policy change would cost the firm \$802.03/day, or \$292,741/year. FV 1 + ( i х n ) PV =

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Firm XYZ’s Decision 4 Now assu me sales do incre ase. As sales incre ase, Remember, we are concerned with all relevant cash flows. Here, since the timing and/or amounts of cash inflows AND cash outflows are impacted, all are relevant.
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