A Firm Currently Sells Its Product with a 2% Discount

question 62

Multiple Choice

A firm currently sells its product with a 2% discount to customers who pay by cash or credit card when they purchase one of the firm's products; otherwise, the full price is due within 30 days. Forty percent of customers take advantage of the discount. The firm plans to drop the discount so the new terms will simply be net 30. In doing so it expects to sell 100 fewer units per month and all customers to pay at day 30. The firm currently sells 1000 units per month at a cost per unit of $45 and a selling price per unit of $80. If the firm's required return is 2%, what is the net present value (NPV) of making this change? (Assume that all 1,000 units are sold at the beginning of the month and the cost of producing the units is paid immediately.)

• A)-$169,860
• B)-$122,420
• C)$64,490
• D)$172,320

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Definitions:

Total Expenditures

The sum of all spending or expenses incurred by an individual, organization, or government.

Close Substitutes

Products or services that can serve almost the same function as another in the eyes of consumers.

Price Increase

The rise in the cost of goods or services over time, which can be caused by factors such as inflation, increased production costs, or high demand.

Inelastic Demand

A market situation where the demand for a product does not significantly change with a change in price.