The Corporation is considering a change in its cashonly poli

The Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.0 percent per period.

What is the break-even quantity for the new credit policy?

References

Solution

The cost of switching credit policies is:

Cost of new policy = ?[PQ + Q(v? ? v) + v?(Q? ? Q)]

And the cash flow from switching, which is a perpetuity, is:

Cash flow from new policy = [Q?(P? ? v?) – Q(P ? v)]

For finding Breaking-Even Quantity, NPV is equal to Zero. Hence,

.NPV = 0 = -[($84)(4,100) + (4,100)($44 - $44) + ($44)(Q\' - 4,100)] + [Q\'($86 - $44) - ($4,100) ($84 - $44)] / 0.02

0 = -$344,400 - $0 - $44Q\' + $180,400 + $2,100Q\' - $8,200,000

$2,056Q\' = $8,364,000

Q\' = $8,364,000/$2,056 = 4,068.09