Ajax Predicts That If a Customer Pays on the First

question 88

Multiple Choice

Ajax predicts that if a customer pays on the first sale, it is assured that it is a reliable customer.As such, it expects that customer to generate a net profit of $350 per year for 12 years.Ajax calculates present value with a 15% rate of return.There is a 90% probability that Ajax will secure a reliable customer.However, if the customer defaults, Ajax will have to incur a loss of $500.Determine the expected benefit if credit is granted.

• A)$1,657
• B)$1,757
• C)$1,857
• D)$1,957 Present value of $350 profit for 12 years at 15% = $1,897
• P x PV(REV - COST) - (1-p) x PV(COST)

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