What credit decision is appropriate for a potential customer that offers an 80 percent chance of paying in one month on a $2,000 sale that has a present value of cost of $1,600 when the monthly interest rate is 1

Finance Aug 12, 2020

What credit decision is appropriate for a potential customer that offers an 80 percent chance of paying in one month on a $2,000 sale that has a present value of cost of $1,600 when the monthly interest rate is 1.5 percent?

Expert Solution

Computation of Profit/(Loss):

Expected Payment to be made by Customer = $2000 * 80% =$1,600

Present value of Expected payment to be made by customer = $1,600/1.015= $1,576.35

Profit = $1,576.35 - $1,600 = -$23.65

Refuse credit since expected loss is $23.65

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