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The Tradition Corporation is considering a change in its cash-only policy. The new terms would be...

The Tradition Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 1.2 percent per period. Current Policy New Policy Price per unit $ 50 $ 52 Cost per unit $ 30 $ 30 Unit sales per month 2,000 2,125 Calculate the NPV of the decision to change credit policies. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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Expert Solution

Solution:

Assumption:

It has been assumed that one period here refers to one month.

Summary:

In the above answer, since the present value of net amount realized,i.e., profit earned by the corporation in the new policy is higher than that in the current policy, the company should go ahead with the new policy.

The extra profit that it would make in today's value by implementing the new policy = $ (46,195.65 - 40,000) = $ 6,195.65.

Required return for one period has been used as the discounting rate for that period.

jeff jeffy answered 2 years ago
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