Purchase Solution

Present Value (PV): Switching to Cash Sales vs. Trade Credit

Not what you're looking for?

Ask Custom Question

Light City sells its network browsing software for $20 per copy to computer software distributors and allows its customers 1 month to pay their bills. The cost of the software is $13.50 per copy. The industry is very new and unsettled, however, and the probability that a new customer granted credit will go bankrupt within the next month is 28 percent. The firm is considering switching to a cash-on-delivery credit policy to reduce its exposure to defaults on trade credit. The discount rate is 1 percent per month. The present value of a sale under current credit terms is:

Question 6 answers
a.$0.58
b.0.76
c.1.02
d.1.14.

Purchase this Solution
Solution Summary

The solution determines the present value (PV) from switching to cash sales versus trade credits.

Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

View More Free Quizzes
Related BrainMass Solutions

  • The Implications of Liberal Credit Terms to Customers

    PV of CF = present value of cash flow = CF/DF 66.7/.9091 = 60.6 for year 2001 and so on. Cum PV of CF = cumulative present value of cash flow = 60.6 for year 2001, then add 63.4 for 2002 to get cumulative 124.0 through 2003 and so on.

  • Trade Credit: NPV, Factors Affecting Collection Period

    The solution discusses the trade credit, in particular the net present value, and factors affecting the collection period.

  • Measures for profitability, operating cycle

    If the sales are made on credit, the firm still would not have cash and thus may not be in a position to pay. That is why operating period should be the upper limit since the firm has got the cash back.

  • Working Capital Management.

    The terms are changed from 2/10, net 30 (0) (+) (0) To 3/10, net 40 Both credit and cash terms are relaxed leading to higher sales.

  • Credit Policy

    25562 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.

  • Credit Policy Answers

    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.

  • Credit Decision Analysis

    37323 Credit Decision Analysis 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.

  • Credit Policy

    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.

  • Cost of Loan, Net Credit Position, PV, YTM, Cost of Debt

    PV = PMT where; PV is the present value PMT is the yearly earning I is the interest rate N is the number years Present value at 4%: PV = PMT PV = $200,000 = $3,958,554.78 Present value at 12%: PV = PMT PV = $200,000 = $1,648,755.34

View More Related Solutions