FIN – Tricia Velasquez wishes to apply NPV analysis

  

Tricia Velasquez wishes to apply NPV analysis to a newly received order. The company’s credit terms are net 45 days. Its opportunity cost of funds is 12 percent. The order dollar amount is $30,000. She finds out from cost accounting department that variable costs are approximately 65 percent of sales and that incremental credit administration and collection expenses approach 1 percent of sales.a. Assuming that the customer will pay according to the credit terms, with perfect certainty, should Tricia approve the order?b. Assume that further research indicates that payment probabilities and timing for accounts similar to the credit applicant are as follows:Payment timing: probabilityWith 45 days .5045-60 days .3060-90 days .15Over 90 days .05