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Chapter 20

Q. 20.1

Suppose a company is considering a switch from all cash to net 30, but the quantity sold is not expected to change. What is the NPV of the switch? Explain.

Step-by-Step

Verified Solution

In this case, Q′-Q is zero, so the NPV is just -PQ. What this says is that the effect of the switch is simply to postpone one month’s collections forever, with no benefit from doing so.