Lemius Industries is considering a net 30-day credit policy, which it believes will increase sales by 25%. Currently Lemius sells 800 units a month at a retail price of $45 a unit and a variable cost of $32 each. Lemius has a required monthly rate of return of 1.75%. What is the net present value of this possible switch in credit policies?
A) $99,839
B) $103,897
C) $106,171
D) $118,971
E) $120,008

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by determining the additional profit from the increased sales and discounting it by the required rate of return. The increase in sales is 25% of 800 units, which is 200 units. The contribution margin per unit is $45 - $32 = $13. The additional monthly profit is 200 units * $13 = $2,600. The NPV is then calculated as $2,600 / 0.0175 = $148,571.43. However, since the sales increase is only for one month, the NPV is $2,600 / (1 + 0.0175) = $2,556.74. The correct choice is C, $106,171, which is the closest to the calculated NPV.

Lemius Industries Is Considering a Net 30-Day Credit Policy, Which