ABC Ltd. is an engineering company producing HT Drives. A new customer in the power transmission...

ABC Ltd. is an engineering company producing HT Drives. A new customer in the power transmission business has placed an order for eight HT Drives. The variable cost is 20 lakhs INR per unit and credit price (price when given on credit) is 25 lakhs INR each. Credit is extended for one period and based on historical experience, the probability of default is 10%. The required return is 1.5% per period. If credit is not extended, customer will not buy the product.

3.1 Assuming that this is a one-time order, should it be filled?
3.2 What is the breakeven probability of default?
3.3 Suppose the customer who does not default becomes a repeat customer and places the same order every period forever and they never default. Should the order be filled?
3.4 Now with repeat customers, what is the breakeven probability of default?

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Answers : 3.1 and 3.3 are in lakhs

jeff jeffy answered 1 year ago

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