Alex Is New in Town and Has Asked to Establish

question 362

Multiple Choice

Alex is new in town and has asked to establish credit with your firm. He would like to buy some lawn equipment today at a cost of $2,495. Your variable cost for that equipment is $1,875 and your monthly interest rate is 1.3 percent. You feel that Alex could become a regular customer if you grant him 30 days credit. You also feel that the probability of default is only 3 percent. What is the net present value of this decision?

• A) $21,406
• B) $22,009
• C) $38,112
• D) $44,387
• E) $47,108

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Definitions:

Progressive Rate

A tax system in which the tax rate increases as the taxable income increases.

Average Tax Rate

The proportion of total income that is paid in taxes, calculated by dividing the total amount of taxes paid by the taxpayer’s total income.

Tax Liability

The total amount of tax owed to the government by an individual, corporation, or other entity in a specified tax period.

Form 1040EZ

A simplified tax form for individuals with straightforward financial situations, allowing them to report income and calculate taxes owed.