H Corp is considering a change in its cash-only policy for perpetual orders

It means that the present value of future incremental cash flow will be (Increased Unit sold x Gross Profit per unit) / cost of return per month

Increased Units = (Units sold under new policy – Unit sold under old policy) 1250- 1200 = 50

Gross Proft per unit (310-270) = 40

PV of incremental cash flow will be (50 x 40) / 0.02 = 100000

(As question has said that orders are perpetuity thus the monthly cash flow will be treated as perpetuity.)

Now we will calculate the cost of switching the policy:

There will be two parts of the cost:

1. Nos. of units to be sold will increase thus cost of production will also increase.

2. The sales under the cash policy will not be there throughout the month if we switch to credit policy.

So we will have to take both in to count

So,

1. Cost of production for increased quantity will be (1250-1200= 50) x 270 = 13500.

2. Sales to be foregone = 300 x 1200 = 360000.

Hence, total cost of switching will be 360000 + 13500 = 373500.

& we have calculated earlier the benefit of switching = (50 x 40) / 0.02 = 100000

Hence the NPV would be (Benefit of switch – Cost of switching)

= (100000 - 373500) = - 273500 (Loss)

Thus the switching to Credit Policy from Cash policy is not recommended as it would incur a loss of 273500.