Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 100 units have been made by customers requesting credit. The variable cost is $8,200 per unit, and the credit price is $10,000 each. Credit is extended for one period. The required return is 1.1 percent per period and the probability of default is 10 percent. Assume the number of repeat customers is affected by the defaults. In other words, 25 percent of the customers who do not default are expected to be repeat customers. Calculate the NPV of the decision to grant credit. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 100 units have been made by customers requesting credit. The variable cost is $8,200 per unit, and the credit price is $10,000 each. Credit is extended for one period. The required return is 1.1 percent per period and the probability of default is 10 percent. Assume the number of repeat customers is affected by the defaults. In other words, 25 percent of the customers who do not default are expected to be repeat customers. Calculate the NPV of the decision to grant credit. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Related questions
| Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $3.5 million per unit, and the credit price is $3.805 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 125 such orders is never collected. The required return is 4.1 percent per period. |
| a-1 | What is the NPV per engine purchased on credit? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your answer to 2 decimal places. (e.g., 32.16)) |
| NPV | $ | per unit |
| a-2 | Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended. | ||||
|
| b. | What is the break-even probability of default in part (a)? (Round your answer to 2 decimal places. (e.g., 32.16)) |
| Break-even probability | % |
| c-1 | Suppose that customers who donât default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. What is the NPV per engine purchased on credit? |
| NPV | $ | per unit |
| c-2 | Assuming the customer becomes a repeat customer, what is the break-even probability of default? (Round your answer to 2 decimal places. (e.g., 32.16)) |
| Break-even probability | % |
| Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $3.2 million per unit, and the credit price is $3.505 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 200 such orders is never collected. The required return is 3.8 percent per period. |
| a-1 | What is the NPV per engine purchased on credit? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your answer to 2 decimal places. (e.g., 32.16)) |
| NPV | $ | per unit |
| a-2 | Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended. | ||||
|
| b. | What is the break-even probability of default in part (a)? (Round your answer to 2 decimal places. (e.g., 32.16)) |
| Break-even probability | % |
| c-1 | Suppose that customers who donât default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. What is the NPV per engine purchased on credit? |
| NPV | $ | per unit |
| c-2 | Assuming the customer becomes a repeat customer, what is the break-even probability of default?(Round your answer to 2 decimal places. (e.g., 32.16)) |
| Break-even probability | % |
