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A seller is considering the effect on firm value from transitioning a long- time customer from cash terms to credit terms. For years, the customer has purchased 20 units every 60 days. The seller believes that extending credit terms of net 60 days will encourage the customer to increase their purchase quantity to 25 units. Each unit sells for $5 and the seller incurs immediate variable costs of $3 per unit. The seller has an annual opportunity cost rate of 3.65%. Assuming that the customer just placed an order on cash terms, what is the NPV of extending credit if sales continue every 60 days in perpetuity? Select one: a. -$1,551.66 b. $1,551.66 C. $6,706.67 d. $8,258.33

A seller is considering the effect on firm value from transitioning a long- time customer from cash terms to credit terms. For years, the customer has purchased 20 units every 60 days. The seller believes that extending credit terms of net 60 days will encourage the customer to increase their purchase quantity to 25 units. Each unit sells for $5 and the seller incurs immediate variable costs of $3 per unit. The seller has an annual opportunity cost rate of 3.65%. Assuming that the customer just placed an order on cash terms, what is the NPV of extending credit if sales continue every 60 days in perpetuity? Select one: a. -$1,551.66 b. $1,551.66 C. $6,706.67 d. $8,258.33

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A seller is considering the effect on firm value from transitioning a long- time customer from cash terms to credit terms. For years, the customer has purchased 20 units every 60 days. The seller believes that extending credit terms of net 60 days will encourage the customer to increase their purchase quantity to 25 units. Each unit sells for $5 and the seller incurs immediate variable costs of $3 per unit. The seller has an annual opportunity cost rate of 3.65%. Assuming that the customer just placed an order on cash terms, what is the NPV of extending credit if sales continue every 60 days in perpetuity? Select one: a. -$1,551.66 b. $1,551.66 C. $6,706.67 d. $8,258.33
Transcribed Image Text:A seller is considering the effect on firm value from transitioning a long- time customer from cash terms to credit terms. For years, the customer has purchased 20 units every 60 days. The seller believes that extending credit terms of net 60 days will encourage the customer to increase their purchase quantity to 25 units. Each unit sells for $5 and the seller incurs immediate variable costs of $3 per unit. The seller has an annual opportunity cost rate of 3.65%. Assuming that the customer just placed an order on cash terms, what is the NPV of extending credit if sales continue every 60 days in perpetuity? Select one: a. -$1,551.66 b. $1,551.66 C. $6,706.67 d. $8,258.33
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