What is the break-even probability of default

Assignment Help Financial Management

Reference no: EM131350593

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 $3.4 million per unit, and the credit price is $3.705 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 100 such orders is never collected. The required return is 4.0 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. Yes No 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 don't 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 %

Reference no: EM131350593

Questions Cloud

Stock and bond position would replicate payoffs of option : Assume that a stock can move up by 15% or down by 15%. Assume that the current share price is $100 and that there is a call option on the stock with a strike price of $95. The periodic risk-free interest rate is 6%. What stock and bond position would..

Disregarding transaction costs : A seller of a call option on a stock expects _______. Disregarding transaction costs, if a put buyer breaks even, the put writer _______.

Mullineaux corporation has target capital structure : Mullineaux Corporation has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 9 percent, the cost of preferred stock is 6 percent, and the pretax cost of debt is 8 percent. The..

Estimate along with best- and worst-case scenarios : Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. Calculate a point ..

What is the break-even probability of default : 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. What is the NPV per engine purcha..

Simple rate of return on new automated bottling machine : The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $60,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. Compute the simple rate of return on the new aut..

Difference between forwards and futures : Which of the following is not a difference between forwards and futures? Long hedges are used by investors willing to _______.

Selling expenses-what is company operating cash flow : During 2014, Raines Umbrella Corp. had sales of $880,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $90,000, and $135,000, respectively. What is the company's operating cash flow?

Binomial option pricing model value call option : Suppose you had a stock currently valued at $100. One period later, you estimate that the stock price will either increase by 15% (to $115) or decrease by 10% (to $90). If the one-period rate of interest is 5%, at what price would the binomial option..

User Account

All Pages