CHAPTER 20 APPENDIX

CREDIT AND INVENTORY MANAGEMENT

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 ALTERNATIVE CREDIT POLICY
ANALYSIS
• The One-Shot Approach
▪ Evaluate the benefit of a one-time switch in credit policy
by calculating the NPV of the incremental cash flows.

• The Accounts Receivable Approach

▪ Evaluate the NPV based on the cost of carrying
receivables plus the incremental investment, relative to the
benefit of the change.

• Both approaches provide the same NPV solution.

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 DISCOUNTS AND DEFAULT RISK
 = percentage of credit sales that go uncollected
d = percentage discount allowed for cash customers
P = credit price (no discount)
P = cash price = P(1 – d)

Assuming no change in Q, then:

Net incremental cash flow =

[(1 - )P - v]Q – (P – v)Q = PQ(d - )

• NPV = -PQ + PQ(d - )/R

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 END OF CHAPTER
CHAPTER 20 APPENDIX

20A-4
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.