Which of the Following Credit Decisions Appears Correct for a Customer

question 50

Multiple Choice

Which of the following credit decisions appears correct for a customer that intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

• A)Reject because expected loss equals $320
• B)Reject because expected profit equals $0
• C)Accept because expected profit equals $1,440
• D)Accept because expected profit equals $3,200 expected profit = (p x PV of profit) - (1 - p) x cost
• = )8 x ($200/.10) - (1 - .8) x $800
• = $1,600 - $160

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