Reference no: EM132413532
Suppose that a company currently manufactures widgets and requires immediate cash payment upfront for all sales. They also pay immediately for all goods produced.
Suppose the following:
Current Price per unit (P) = $9
Current average monthly sales quantity (Q) = 10,000
Variable cost per unit (v) = $4
Fixed costs = $0 per month
In order to solve this problem, you will need to model the cash flows in each month. For simplicity, assume that ALL cash flows (both positive and negative) occur on the same day each month. Also, assume that today is time 0, next month is time 1, the following month is time 2, etc.). Assume that cash flows will happen each period forever.
ANNUAL required rate of return = 15%
i) What is the present value of all cash flows, including those occurring today?
Present Value = $ (Round to the nearest dollar, with NO decimal! Do NOT use commas!)
The company is considering a change to its credit policy whereby it will require payment within 30 days of the sale (Net 30) instead of cash upfront. Assume that all customers will pay on the due date. It is believed that, under the new policy, price will increase by $1/unit and average monthly sales will increase to 10,500. There is no anticipated change to variable unit costs.
ii) What is the net present value (NPV) of this proposed policy change if the company were to make the change immediately (ie. today, in period 0)? (HINT: Be careful! I am not asking for the present value of the new cash flows, I am asking for the NPV of the CHANGE in cash flows!)
NPV = $ (Round to the nearest dollar, with NO decimal! Do NOT use commas!)