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The Tradition Corporation is considering a change in its cash-only policy
The Tradition Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.4 percent per period. Based on the following information, what is the break-even price per unit that should be charged under the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per unit Cost per unit Unit sales per month Current Policy $ 93 $ 44 2.675 New Policy ? $ 44 2,750 Break-even price
Expert Solution
let the price = p
cash flow from a policy = (price - cost)xquantity
cash flow from current policy = (93-44)x2675 = 131075
cash flow from new policy = (p-44)x2750 = 2750p - 121000
incremental cash flow = 2750p - 121000 - 131075
incremental cash flow = 2750p - 252075
PV of incremental cash inflow = incremental cash flow / rate of return
PV of incremental cash inflow = (2750p-252075)/2.4%
Cost of new project = cash inflow from current policy + new price x (change in quantity)
Cost of new project = 131075 + p x (2750-2675)
Cost of new project = 131075 + 75p
for breakeven ,
Cost of new project = PV of incremental cash inflow
131075 + 75p = (2750p-252075)/2.4%
(131075 + 75p) x 2.4% = 2750p - 252075
3145.8 + 1.8p = 2750p - 252075
255220.8 = 2748.2p
p = 92.87
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