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-A credit analyst has received a $500,000 order from a new

customer. The cost of filling the order (i.e., COGS) is $20,000 and collection costs are 1% of sales. The credit analyst notes that the COGS will be paid immediately. Further, it is assumed that the customer will repay the trade credit obligation in 90 days. It is also assumed that the collection costs will be incurred in 90 days. If the appropriate discount rate is 10%, the NPV of extending credit to the new customer is approximately what?

-a.$245,000

-b.$467,480

-c.$235,229

-d.$321.09

-In the above question, how would NPV change if the repayment period was 45 days instead of 90 days?

-a.decrease by $5,320

-b.increase by $5,320

-c.increase by $5,937

-d.decrease by $5,937

**1) b.$467,480 (approx)**

**1) c.increase by $5,937**

**1)** Investment =20,000

Net Receivable=(500,000-500)

=499,500

PV of Net Receivable=( Net receivable/1+(r*DAYs/365)

=499,500/(1+(0.1*90/365)

=499,500/1.02465753425

=487479.94

=487480

NPV=PV-INVESTMENT

=487480-20,000

**=$467,480**

**Therefore NPV is $467,480. Option b.**

**1)PV of Net Receivable=( Net receivable/1+(r*DAYs/365)**

499,500/(1+(0.1*45/365)

PV=493417

So, NPV=493,417-20,000

=$473417

(473417-467480)

=$5,937

**Therefore NPV increases by $5,937. Option c.**