In: Finance
25)Sosin Inc. manufactures hydrogen engines. Recently 350 new orders placed by customers requesting credit. The variable cost is $16,000 per unit, and the credit price is $18,400 each. Credit is extended for one period, and based on historical experience, payments for 15% of the orders are never collected. The required return is 3% per period. Suppose that customers who don’t default become repeat customers and they never default. Calculate the NPV?
Based on the given data, pls find below steps:
In this question, the credit period is important to determine the time value of the money as the sale happen in period 0 and the receipts of the sale get colllected in Period 1; However, the variable cost related cash outflow happen in Period 0; Also, the 15% of the total sales is mentioned as Bad debt - not collectible; Hence, the cash receipts shall only be 85% of the Total Sales; Based on this, the NPV is -285436.89 and not feasible.