Neilson's is a new firm that sells a product with a variable cost of $62 a unit.The firm has a monthly required return of 1.8 percent.The firm wants to offer all new customers 30 days of credit and expects that if it does so,that 12 percent will default on payment while the others become repeat customers.What is the minimum price the firm could charge to break-even on an NPV basis?
A)$82.15
B)$74.09
C)$63.27
D)$98.14
E)$78.40

Question

Quizplus · Accepted Answer

To calculate the minimum price that Neilson's could charge to break-even on an NPV basis, we can use the following formula:

Minimum price = (Variable cost / (1 - Required return rate)) / (1 - Probability of default)

Plugging in the given values, we get:

Minimum price = ($62 / (1 - 0.018)) / (1 - 0.12) = $63.27

Therefore, the best choice is C, $63.27.

Neilson's Is a New Firm That Sells a Product with a Variable