What is the npv of selling the computer program on credit

Assignment Help Financial Management

Reference no: EM131550979

Algebra Ltd is selling inventory managment software for small to mid-size firms. Currently the computer program is sold only for cash. In order to increase its revenues, the company is considering the alternative of offering a credit for one month to all its customers. However, by providing customer credit, the company expects that it will incur the risk of attracting high risk customers that could default on their payments. The two strategies are outlined below:

Cash based sales Credit sales

Unit Sale Price $100 $100

Quantity Sold 100 130

Cost per Unit $50 $55*

Probability of customer defaulting 0% 10%

*The $5 difference in unit cost reflects the cost of managing the credit policy

Algebra Ltd cost of capital is 1% per month. Show computations if applicable.

a. What is the net present value (NPV) of selling the computer program for cash?

b. What is the NPV of selling the computer program on credit?

c. What should Algebra Ltd do?

Reference no: EM131550979

Questions Cloud

What is current beta on mmes common stock : What is the current beta on MME's common stock? What would MME's beta be if the company had no debt in its capital structure?

Compare the government bonds to corporate bonds : Compare and contrast (in detail) Government Bonds to Corporate Bonds.

Considering an investment in keller corporation stocks : You are considering an investment in Keller Corporation’s stocks,

Value of three-month european call option on the stock : Calculate the value of a three-month European call option on the stock with an exercise price of $48,

What is the npv of selling the computer program on credit : What is the net present value (NPV) of selling the computer program for cash? What is the NPV of selling the computer program on credit?

Determine cash flows associated with the different truck : Determine the cash flows associated with the different trucks for each year of the project.

What is the price of the option if it is european call : What is the price of the option if it is a European call? Show that the put-call parity condition holds (or does not hold)?

What are reasons for popularity compared to spot options : How are futures options used and what are the reasons for their popularity compared to spot options?

Steve trucking company-capital budgeting analysis : Steve is a contract carrier for the United States Postal Service. Calculate the PB period, Discounted PB, IRR, and NPV for the two alternatives.

User Account

All Pages