barn yard. inc is a wholesaler that stocks engine components and tests 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 1.6 million per unit, and the credit price is 1.725 million each. Credit is extended for one period, and based on historical experience, payment for about one out of every 200 such orders is never collected. The required return is 1.8 percent per period.
a) 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 od default in part (a)?
b) Suppose that customers who dont defaukt become repeat customers and place the same order every every period forever. Further assume that repeat customers never default. Should the order be filled? what is the break-even probability of default?
d) describe in general terms why credit will be more liberal when repeat orders are a possibility.
barn yard. inc is a wholesaler that stocks engine components and tests 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 1.6 million per unit, and the credit price is 1.725 million each. Credit is extended for one period, and based on historical experience, payment for about one out of every 200 such orders is never collected. The required return is 1.8 percent per period.
a) 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 od default in part (a)?
b) Suppose that customers who dont defaukt become repeat customers and place the same order every every period forever. Further assume that repeat customers never default. Should the order be filled? what is the break-even probability of default?
d) describe in general terms why credit will be more liberal when repeat orders are a possibility.
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 | % |
