The Default Rate of Demurrage Associates' New Customers Has Been

question 50

Multiple Choice

The default rate of Demurrage Associates' new customers has been running at 10 percent. The average sale for each new customer amounts to $800, generating a present value of profit of $100 and a 40 percent chance of a second order next year. The default rate on second orders is only 2 percent. If the interest rate is 9 percent, what is the expected profit from each new customer? (Examine only the first two periods of potential orders.)

• A)$88.70
• B)$47.74
• C)$43.25
• D)$50.83

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Definitions:

Compounded Annually

A method of calculating interest in which the accumulated interest is added to the principal at the end of each year, with future interest then calculated on the new total.

Percentage Increase

A measure of the degree to which a quantity has grown in proportion to its initial value, expressed as a percentage.

Compounding

The process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time.

Average Rate Of Return

A financial ratio that estimates the profitability on an investment over a period.