What Credit Decision Is Appropriate for a Potential Customer That

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value) sale that has an 80% (present value) cost?

A) Grant credit since expected profit is $3,200
B) Grant credit since expected profit is $800
C) Refuse credit since expected profit is zero
D) Refuse credit since expected loss is $3,000 Expected profit from offering credit:
= p x PV(Rev - cost) - (1 - p) x PV(cost)
= ) 8 x PV($10,000 - 8,000) - .2 x PV(8,000)
= PV1,600 - PV1,600

Correct Answer:

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