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Credit Policy Answers

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16. Credit Policy. A firm currently makes only cash sales. It estimates that allowing trade credit
on terms of net 30 would increase monthly sales from 200 to 220 units per month. The price
per unit is $101 and the cost (in present value terms) is $80. The interest rate is 1 percent per
month.
a. Should the firm change its credit policy?
b. Would your answer to (a) change if 5 percent of all customers will fail to pay their bills
under the new credit policy?
c. What if 5 percent of only the new customers fail to pay their bills? The current customers
take advantage of the 30 days of free credit but remain safe credit risks.

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Solution Preview

#16

A) The firm should trade its credit policy. In today's market, by limiting one to only paying cash is limiting your business assets.

b) I will still answer yes even if 5% of the customers fail to pay. 5% of 220 ...

Solution Summary

The solution answers the following quesions.

16. Credit Policy. A firm currently makes only cash sales. It estimates that allowing trade credit
on terms of net 30 would increase monthly sales from 200 to 220 units per month. The price
per unit is $101 and the cost (in present value terms) is $80. The interest rate is 1 percent per
month.
a. Should the firm change its credit policy?
b. Would your answer to (a) change if 5 percent of all customers will fail to pay their bills
under the new credit policy?
c. What if 5 percent of only the new customers fail to pay their bills? The current customers
take advantage of the 30 days of free credit but remain safe credit risks.

$2.19
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