Reference no: EM132914117

Molly Inc. currently offers generous credit to its customers, with a "3/60 net 90" policy. Molly's customers who do pay all pay within 60 days and receive the discount, but Molly never collects on 15% of the units it sells. Current sales are 10,000 units per day, with a per unit list price of $75 and per unit cost of $58 (all costs are paid in cash at time 0). Molly is considering a change to its credit policy, and wants to know if it should adopt a "net 30" policy.

Under the net 30 policy, Molly expects that sales will drop to 7,500 units, but the price charged will remain the same. Unit costs will rise by 5% per unit due to the lower production volume, but Molly will now not offer a cash discount and all will be paid on day 30. Molly's (effective annual) discount rate is 8% per year and there are no taxes. Assume a 365 day year in your calculations.

Problem 1: What probability of customer payment under the proposed policy that would make the company indifferent between the two policies?