A new customer has placed an order for a turbine engine that has a variable cost of $1.12 million per unit and a credit sales price of $1.64 million. Credit is extended for one period. Based on historical experience, payment for about 1 out of every 178 such orders is never collected. The required return is 2.1 percent per period. What is the NPV per unit if this is a one-time order?
A) $516,407
B) $421,819
C) $477,244
D) $534,290
E) $351,056

Question

Quizplus · Accepted Answer

The NPV per unit can be calculated using the formula: NPV = (P - V - (P * L)) / (1 + r), where P is the price, V is the variable cost, L is the loss probability, and r is the required return rate. Here, P = $1.64 million, V = $1.12 million, L = 1/178, and r = 0.021. Plugging these values in gives: NPV = ($1.64M - $1.12M - ($1.64M * (1/178))) / (1 + 0.021) = $0.52M - $0.0092M / 1.021 ≈ $477,244.

A New Customer Has Placed an Order for a Turbine