QUESTION 2 1. The NPV of the existing cash only policy is $l500000-$1125000 $375000 2. NPV of the proposed cred it policy is NPV=∑(FxPⅤHF1)I (0.35225000,(0.252250000(0.35225000 1.0125 1.0125 (1.102 -(0.75225000 787500562500787500 1687500 1.0125(1.0125(1.012 777778+54897758921687500 39b67 3. The NPv of the credit policy the NPv of the cash only" policy, therefore proceed ALTERNATIVE SOLUTION △ Sales △ Costs NCF PVE Present a125% 0-15000004-562500*-2062500 2062500 787500 787500098765477778 562500 5625000975461548697 787500 7875000963418758692 NPV=$22667# Current cash sales now foregone * 75% of add itional sales #$22667 is equal to$397667-$375000August 2003 QUESTION 2 1. The NPV of the existing ‘cash only’ policy is: = $1 500 000 - $1 125 000 = $375 000 2. NPV of the proposed credit policy is: ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) = $ 3 9 7667 = 777778+ 548697+ 758692-1 687500 -1 687500 1 .0 1 2 5 787500 + 1 .0 1 2 5 562500 + 1 .0 1 2 5 787500 = - 0 .7 5 2 250000 1 .1 0 2 5 0 .3 5 2 250000 1 .0 1 2 5 0 .2 5 2 2 5 0000 1 .0 1 2 5 0 .3 5 2 250000 NP V = C F P VIF - I I 2 3 2 3 n t =1 t k ,t   +  +  =   3. The NPV of the credit policy > the NPV of the ‘cash only” policy, therefore proceed with the proposed change. ALTERNATIVE SOLUTION t  Sales  Costs NCF PVIF @ 1.25% Present Value 0 -1 500 000* -562 500** -2 062 500 1 -2 062 500 1 787 500 787 500 0.987654 777 778 2 562 500 562 500 0.975461 548 697 3 787 500 787 500 0.963418 758 692 NPV = $22 667# * Current cash sales now foregone. ** 75% of additional sales. # $22 667 is equal to $397 667 - $375 000