Question

Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 140 units have been made by customers requesting credit. The variable cost is $9,800 per unit, and the credit price is $12,000 each. Credit is extended for one period. The required return is 1.9 percent per period. If Solar Engines extends credit, it expects that 15 percent of the customers will be repeat customers and place the same order every period forever and the remaining customers will be one-time orders. Calculate the NPV of the decision to grant credit. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV $

Answer 1

	A	B
1	New order in Units	140
2	Credit price per unit	12000
3	Variable cost per unit	9800
4	Total Revenue = (B1*B2)	1680000
5	Total Variable cost = (B1*B3)	1372000
6	Credit is extended for one period	1
7	Required return per period	1.90%
8	Repeat customers (place order every period forever)	15%
9	one time orders (100%-15%)	85%
10
11	Present Value of cash flows from repeat customers (perpetuity )
12	Total Revenue	1680000
13	Total Variable cost (incurred every period in case of repeat customer)	1372000
14	Cash flow from repeat customers = 15% (B12-B13)	46200
15	Present Value = (cash flow / required return per period) = B14/B7	2431578.95
16
17	Present Value of cash flows from one time customers
18	Total Revenue	1680000
19	Cash flow from one time customers (85%) = B18 *B9	1428000
20	Present Value = Cash flow / (1+ required return per period)   = B19/(1+B7)	1401373.90
21
22	Net present Value
23	Cash flow from repeat customers	2431578.95
24	Cash flow from one time customers	1401373.90
25	Total Variable cost	1372000
26	Net present Value = (B23 + B24 - B25)	2460952.84
27	NPV is positive , credit should be extended