Consider the case of the Cast Iron Company On each nondelinq

Consider the case of the Cast Iron Company On each nondelinquent sale. Cast Iron receives revenues with a present value of $1310 and incurs costs with a present value of $1,000. Cast Iron\'s costs have increased from $1,000 to $1160. Assuming that there is no possibility of repeat orders and that the probability of successful collection from the customer is p 0.95, answer the following o-1. What is the expected profit of granting credit? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected profit per sale e-2. Should Cast Iron grant or refuse credt? 0 885 Grant b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.) Break-even probability

Solution

a -1 Profit(Loss) = [p × PV(REV – COST) – (1 – p) × PV(COST)] = [.95 × ($1,310 – 1,160) – (1 – .95) × $1,160] = $84.50 a -2 Since the sale results in a net profit, credit should be granted b p = PV(COST) / PV(REV) = $1,160/$1,310 = .885 or 88.5%