Your company is evaluating a switch from a cash policy to a net 30 policy. The price per unit is $49, and the variable cost per unit is $20. The company currently sells 100 units per month. Under the proposed policy, the company expects to sell 110 units per month. The required monthly return is 2%.a-What is the effective annualized rate for this “loan” triggered by the credit policy? 2. Your company is evaluating a switch from a cash policy to a net 30 policy. The priceper unit is $49, and the variable cost per unit is $20. The company currently sells 100units per month. Under the proposed policy, the company expects to sell 110 unitsper month. The required monthly return is 2%.a) What is the NPV of the switch?Part 1:Incremental cash flow = (P – V)(S' – 5)Incremental cash flow = ($49 – $20)($110 – 100)Incremental cash flow = $29 * $10 = $290t 2:Incremental cash flowCost of capitalIncremental cash flowIncremental cash flow =02$290= $14500Part 3:Switch Cost = (P + S) + V(S' – 5)Switch cost = ($49 + 100) + $20($110 – $100)Switch cost = $4900 + $200 = $5100Therefore:NPV of Switch = $14500 – $5100 = $9400

Effective interest rate is interest rate considering the effect of compounding and this annual rate…

Answered: Your company is evaluating a switch…

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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Your company is evaluating a switch from a cash policy to a net 30 policy. The price per unit is $49, and the variable cost per unit is $20. The company currently sells 100 units per month. Under the proposed policy, the company expects to sell 110 units per month. The required monthly return is 2%.

a-What is the effective annualized rate for this “loan” triggered by the credit policy?

2. Your company is evaluating a switch from a cash policy to a net 30 policy. The price
per unit is $49, and the variable cost per unit is $20. The company currently sells 100
units per month. Under the proposed policy, the company expects to sell 110 units
per month. The required monthly return is 2%.
a) What is the NPV of the switch?
Part 1:
Incremental cash flow = (P – V)(S' – 5)
Incremental cash flow = ($49 – $20)($110 – 100)
Incremental cash flow = $29 * $10 = $290
t 2:
Incremental cash flow
Cost of capital
Incremental cash flow
Incremental cash flow =02
$290
= $14500
Part 3:
Switch Cost = (P + S) + V(S' – 5)
Switch cost = ($49 + 100) + $20($110 – $100)
Switch cost = $4900 + $200 = $5100
Therefore:
NPV of Switch = $14500 – $5100 = $9400

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