The Default Rate of Demurrage Associates' New Customers Has Been

question 13

Multiple Choice

The default rate of Demurrage Associates' new customers has been running at 10%.The average sale for each new customer amounts to $800,generating a present value of profit of $100 and a 40% chance of a second order next year.The default rate on second orders is only 2%.If the interest rate is 9%,what is the expected profit from each new customer? (Examine only the first two periods of potential orders.)

• A)$88.70
• B)$47.74
• C)$43.25

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Definitions:

Break-even Point

The point at which total costs and total revenues are equal, meaning that a business, project, or investment is neither making a loss nor a profit.

Normal Profit

The minimum profit necessary for a company to remain competitive in the market; it corresponds to the opportunity cost of capital.

Product Price

The amount of money charged for a product or service, determined by factors such as cost of production, market demand, and competition.

Curve Steepness

The rate at which the slope of a curve increases or decreases, often used in economics to describe the sensitivity of one variable to another.