I need help with question 18. Thank you! Use the following information to answer
ID: 2811675 • Letter: I
Question
I need help with question 18. Thank you!
Use the following information to answer the next 4 questions. Williams Inc just received a 75,000 order from a new customer, Smith Inc. The customer wants to receive the normal 30 day credit term that Williams Inc offers its repeat customers. Williams' variable cost and expense ratios are 50% and 2%, respectively. Williams has a 10% cost of capital. What is the NPV of the order if Smith Inc pays in exactly 30 days?
72,902.2
31,251.2
36,890
35,402.2
5 points
QUESTION 17
Now assume that Williams isn't exactly sure of when Smith Inc will pay the invoice. Specifically, Williams assumes that Smith will pay at the end of one of the following three collection periods. The collection periods, DSOs and probabilities are shown below:
CP
DSO
Probability
1
30
.10
2
90
.30
3
270
.60
Assume that the 2% credit administration cost is incurred in each of the three collection periods (in other words, if Smith pays in 90 days, Williams will incur a 2% credit admin, for each of the first two periods). Accounts that fall into CP 3 are turned over to a collections agency. The collection agency typically collects 50% of the amount invoiced and charges a fee of 40% of the invoiced amount.
Find the total EXP for period 3.
39,000
42,000
31,500
34,500
5 points
QUESTION 18
Find the NPV of the credit extension if Smith pays in period 2. Round your final answer to two decimals.
33,515.96
36,125.35
32,767.38
31,561.23
5 points
Explanation / Answer
Soln: Part 18 : Please refer the table here as per the given data we have calculated the Net value
i.e. :
Now, we are considering here that Revenue will be ralised at t = 90 days while the cost incurred at t = 0
Based on that we can get NPV = 75000*0.910.25 - Total cost
Total cost = 37500+1500+!500 = 40500
NPV = 73257.96 - 40500 = 32757.96
We can say option 3 is closest and hence the ans 32767.38
Revenue 75000 Variable cost @50% 37500.00 Expense ratio @ 2% 1500.00 Credit admin @2% 1500.00 Net 34500.00 discount factor 1/(1+10%) 0.91