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Maxwell Corporation has a customer who wants to purchase $60,000 of goods on credit. Maxwell estimates...

Maxwell Corporation has a customer who wants to purchase $60,000 of goods on credit. Maxwell estimates that the customer has a 97% probability of paying the $50,000 in 4 months and a 3% probability of a complete default (paying no cash at all). Assume an investment of 85% of the amount of the sale and a required return of 10% APY. What is the NPV of granting credit?

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Answer #1
Interest rate 10% annual
Monthly interest rate 0.83% monthly
Expected cash flow after 4 months
Cash flow Prob
50000 97%
0 3%
Investment 42500 (85%*50000)
Exp. Cash flow 48500
Cash flow
Month 0 1 2 3 4
Cash flow -42500.00 0.00 0.00 0.00 48500.00
PVF 1.00 0.99 0.98 0.98 0.97
PV of Cash Flow -42500.00 0.00 0.00 0.00 46916.46
NPV $4,416.46
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