Reference no: EM131010363

Tricia Velasquez wishes to apply NPV analysis to a newly received order. The company’s credit terms are net 45 days. Its opportunity cost of funds is 12 percent. The order dollar amount is $30,000. She finds out from the cost accounting department that variable costs are approximately 65 percent of sales and that incremental credit administration and collection expenses approach 1 percent of sales. a. Assuming that the customer will pay according to the credit terms, with perfect certainty, should Tricia approve the order? b. .Assume that further research indicates that payment probabilities and timing for accounts similar to the credit applicant are as follows: PAYMENT TIMING/ PROBABILITY Within 45 days/0.50, 45-60 days/0.30, 60-90 days/ 0.15, Over 90 days/0.05 Assume that payments are received evenly within the above time brackets. The company’s experience is that payment received after 90 days is gotten only after referral to a collection agency. The agency charges 30 percent of the dollar amount of the invoice. It collects, on average, 65 percent of the invoice amount, about one month after referral. Before the agency referral at day 90, and after the 45 days, the company incurs an additional $125 collection cost every 15 days. Based on the expected NPV of the revised situation, should Tricia recommend credit extension?