Your Company Is Considering Granting Credit to a New Customer

question 184

Multiple Choice

Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The chance of default is 8% and the monthly interest rate is 0.8%. The
Customer will pay in 30 days if they do not default. If the customer does not default, they will buy
One unit every month forever. What is the NPV of granting credit?

• A) -$17,025
• B) -$133
• C) $1,147
• D) $1,575
• E) $1,725

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Definitions:

Interest Accrue

Refers to the process where interest amount accumulates on money borrowed or invested over a period of time but has not yet been paid.

Note

A financial document that represents a promise to pay back a loan or debt within a specified timeframe.

Unearned Subscriptions

Income received in advance for subscriptions that have not yet been fulfilled. This is recognized as a liability until the service is rendered.

Subscription Revenue

Income generated from customers who pay a recurring price at regular intervals for access to a product or service.