2. Your company is evaluating a switch from a cash policy to a net 30 policy. The priceper unit is $49, and the variable cost per unit is $20. The company currently sells 100units per month. Under the proposed policy, the company expects to sell 110 unitsper month. The required monthly return is 2%.a) What is the NPV of the switch?Part 1:Incremental cash flow = (P – V)(S' – 5)Incremental cash flow = ($49 – $20)($110 – 100)Incremental cash flow = $29 * $10 = $290t 2:Incremental cash flowCost of capitalIncremental cash flowIncremental cash flow =02$290= $14500Part 3:Switch Cost = (P + S) + V(S' – 5)Switch cost = ($49 + 100) + $20($110 – $100)Switch cost = $4900 + $200 = $5100Therefore:NPV of Switch = $14500 – $5100 = $9400

Here, Selling Price per unit (P) = $49 Variable cost per unit (V) = $20 Sales units (S) = 100 units…

Answered: Your company is evaluating a switch…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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