Copy Cats Co. (CCC) has just received a credit request from a new customer who wants to purchase a copying machine. As input to its decision of whether to grant credit, CCC has made the following estimates and assumptions: - If CCC denies the customer credit, there is a 20 percent chance that the customer will buy the copying machine with cash anyway. Assume that the customer will not make the purchase if s/he does not pay with cash in this scenario. - If CCC grants credit, there is a 70 percent chance that the customer will be a good credit risk. (CCC will collect 100 percent of the purchase price.) - If CCC grants credit, and the customer is a bad credit risk, CCC has two options. Under the first option, CCC would continue to send the customer a bill and hope it is eventually paid. This nonvigorous enforcement has no cost. Under this option, CCC will collect 100 percent, 50 percent, or 0 percent of the amount owed, with probabilities 0.1, 0.2, and 0.7, respectively. Under the second option, CCC would vigorously pursue the collection of the amount owed. To do so would cost CCC 25 percent of the amount owed, regardless of the amount eventually collected. Under this option, CCC will collect 100 percent, 50 percent, or 0 percent of the amount owed, with probabilities 0.3, 0.5, and 0.2, respectively. The copy machine sells for $8,000 and cost CCC $5,000. Ignore the time value of money.
Copy Cats Co. (CCC) has just received a credit request from a new customer who wants to purchase a copying machine. As input to its decision of whether to grant credit, CCC has made the following estimates and assumptions: - If CCC denies the customer credit, there is a 20 percent chance that the customer will buy the copying machine with cash anyway. Assume that the customer will not make the purchase if s/he does not pay with cash in this scenario. - If CCC grants credit, there is a 70 percent chance that the customer will be a good credit risk. (CCC will collect 100 percent of the purchase price.) - If CCC grants credit, and the customer is a bad credit risk, CCC has two options. Under the first option, CCC would continue to send the customer a bill and hope it is eventually paid. This nonvigorous enforcement has no cost. Under this option, CCC will collect 100 percent, 50 percent, or 0 percent of the amount owed, with probabilities 0.1, 0.2, and 0.7, respectively. Under the second option, CCC would vigorously pursue the collection of the amount owed. To do so would cost CCC 25 percent of the amount owed, regardless of the amount eventually collected. Under this option, CCC will collect 100 percent, 50 percent, or 0 percent of the amount owed, with probabilities 0.3, 0.5, and 0.2, respectively. The copy machine sells for $8,000 and cost CCC $5,000. Ignore the time value of money.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Can you do the decision tree?
Transcribed Image Text:Copy Cats Co. (CCC) has just received a credit request from a new customer who wants to purchase a
copying machine. As input to its decision of whether to grant credit, CCC has made the following
estimates and assumptions:
- If CCC denies the customer credit, there is a 20 percent chance that the customer will buy the copying
machine with cash anyway. Assume that the customer will not make the purchase if s/he does not pay
with cash in this scenario.
- If CCC grants credit, there is a 70 percent chance that the customer will be a good credit risk. (CCC will
collect 100 percent of the purchase price.)
- If CCC grants credit, and the customer is a bad credit risk, CCC has two options.
Under the first option, CCC would continue to send the customer a bill and hope it is eventually paid. This
nonvigorous enforcement has no cost. Under this option, CCC will collect 100 percent, 50 percent, or 0
percent of the amount owed, with probabilities 0.1, 0.2, and 0.7, respectively.
Under the second option, CCC would vigorously pursue the collection of the amount owed. To do so
would cost CCC 25 percent of the amount owed, regardless of the amount eventually collected. Under
this option, CCC will collect 100 percent, 50 percent, or 0 percent of the amount owed, with probabilities
0.3, 0.5, and 0.2, respectively.
The copy machine sells for $8,000 and cost CCC $5,000. Ignore the time value of money.
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