Question

Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.7 million per unit, and the credit price is $2.055 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 125 such orders is never collected. The required return is 2.0 percent per period.
Required:
1. What is the NPV per engine purchased on credit? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.) 2. Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended. Yes No ?3. What is the break-even probability of default in part (a)? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Explanation:

1.  NPV = -1,700,000 + 2,055,000 * (1-0.008) / 1.02

          = $298,588.24

2. Yes order should be fulfilled

3. Break-even probability = 1 - 1,700,000 * 1.02 /2,055,000

                                 = 1 - 0.843795

                                      15.62%