Should Credit Be Granted to a Customer Wishing to Purchase

question 2

Multiple Choice

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked-up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

• A)No; the expected loss is $33.33
• B)No; the expected loss is $150.00
• C)Yes; the expected profit is $33.33
• D)Yes; the expected profit is $150.00 expected profit = .65($2,000 x (50/150)) - .35($2,000 x (100/150))
• = )65($666.67) - .35($1,333.34)
• = $433.34 - $466.67

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Definitions:

Interest Rates

The cost of borrowing money or the return on investment for savings, playing a central role in monetary policy and financial decision-making.

Money Demand Curve

A graphical representation showing the relationship between the quantity of money people want to hold and the interest rate, typically depicted as downward sloping.

Interest Rate

The percentage at which interest is charged or paid for the use of money over a period.

Quantity Theory of Money

An economic theory that suggests the general price level of goods and services is directly proportional to the amount of money in circulation.