A Firm Currently Sells Its Product with a 2% Discount

question 77

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?

• A)-$169,860
• B)-$122,420
• C)$64,490
• D)$172,320
• E)$184,730

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Definitions:

Discount Rate

In finance, this rate is used to calculate the present value of future cash flows; in a broader context, it can also refer to the interest rate charged by banks to their most creditworthy customers.

Annual Cash Inflow

The total amount of money received from operations, investments, and financing activities within a year.

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Project Profitability Index

A financial metric that compares the present value of a project's expected cash flows to its initial investment, used to evaluate the relative profitability of investments.