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Neo sells a browser tracker called White Rabbit for a fee of $15. The terms are net 30. The cost of the tracker is $10 each. Customers wanting this particular tracker are known to be unstable and the probability that customers will go bankrupt and not be able to pay is estimated at 25%. Neo is considering switching to an up-front payment before customers can use the tracker. The discount rate is 1% per month.
Required:
A. Should Neo switch to an upfront payment policy? If he does, sales will fall by 40%.
B. How would your analysis for question A change if a customer who was granted credit pays its bills and is expected to generate repeat orders with a very low likelihood of default for the next 6 months? Similarly, customers that pay upfront also will generate on average 6 months of repeat sales.
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