Question

The Snedecker Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2 percent per period. Current Policy New Policy Price per unit $ 85 $ 90 Cost per unit $ 43 $ 43 Unit sales per month 3,300 3,350 Determine the NPV of the new policy.

Answer 1

Explanation:

Calculate the cash flow per unit for the new policy:

Cash Flow per Unit = Price per Unit - Cost per Unit

Cash Flow per Unit = $90 - $43 = $47

Calculate the total cash flow for the new policy per month:

Total Cash Flow (New Policy) = Cash Flow per Unit * Unit Sales per Month

Total Cash Flow (New Policy) = $47 * 3,350 = $157,450

For the Current Policy:

Calculate the cash flow per unit for the current policy:

Cash Flow per Unit = Price per Unit - Cost per Unit

Cash Flow per Unit = $85 - $43 = $42

Calculate the total cash flow for the current policy per month:

Total Cash Flow (Current Policy) = Cash Flow per Unit * Unit Sales per Month

Total Cash Flow (Current Policy) = $42 * 3,300 = $138,600

Now, you have the NPV for each policy:

NPV (New Policy) = Total Cash Flow (New Policy) = $157,450

NPV (Current Policy) = Total Cash Flow (Current Policy) = $138,600

You can see that the NPV for the New Policy is $157,450, and the NPV for the Current Policy is $138,600. If you want to find the difference between them, you can do so by subtracting the NPV of the Current Policy from the NPV of the New Policy:

NPV (New Policy) - NPV (Current Policy) = $157,450 - $138,600 = $18,850

So, the Net Present Value of the New Policy is $18,850 greater than the Net Present Value of the Current Policy.