I will upload the quiz questions on the day of the quiz as it is timed.

6.1

Collection and NPV from the credit policy of 2/10, net 30 and 1% per month interest on all accounts after 30 days.

OLD POLICY
Collection within	10 days	30 days	60 days	90 days
Percentage	10%	30%	40%	20%
Discount/interest	-2%	0%	1%	1%
Collection	10%*(1-2%)	30%	40%+(40%*1%)	20%+(20%*1%*2)
	0.098	0.3	0.404	0.204
Discount Rate	12%	pa
PV	0.098/(1+12%)^10/365	0.3/(1+12%)^30/365	.404/(1+12%)^60/365	.204/(1+12%)^90/365
	0.0977	0.2972	0.3965	0.1984
NPV	0.0977+0.2972+0.3965+0.1984
	0.9898
NEW POLICY
Collection within	10 days	30 days	60 days	90 days
Percentage	10%	50%	30%	10%
Discount/interest	-2%	0%	1.50%	1.50%
Collection	10%*(1-2%)	50%	30%+(30%*1.5%)	10%+(10%*1.5%*2)
	0.098	0.5	0.3045	0.103
Discount Rate	12%	pa
PV	0.098/(1+12%)^10/365	0.5/(1+12%)^30/365	.3045/(1+12%)^60/365	.103/(1+12%)^90/365
	0.0977	0.4954	0.2989	0.1002
NPV	0.0977+0.4954+0.2989+0.1002
	0.9921
Yes, it should try the new policy

For calculating the NPV first the collections have to be determined after taking into account the discounts given on payment within 10 days and interest charged on payment made after 30 days.

After that, the discount rate considered by the company is 12%p.a and days in a year are assumed to be 365. So using this rate the present value of the collection is calculated and a sum total of the amount gives the Net Present Value. The same method applies for both, the old policy as well as the new credit policy.

Since the NPV of the new credit policy is higher the new credit policy should be implemented.

6.2

Cash Sale
Annual Sale	5
COGS	-3.2
NPV	1.8
Credit sale
Annual Sale	5*(1+25%)
	6.25
	Collection from Sale
	30 days	60 days	90 days	Bad Debt	Total
	6.25*20%	6.25*40%	6.25*37%	6.25*3%
	1.25	2.5	2.3125	0.1875	6.25
Discount Rate	12%	pa			-4
PV	1.25/(1+12%)^30/365	2.5/(1+12%)^60/365	2.3125/(1+12%)^90/365	0
	1.238	2.454	2.249	0.000	5.941
COGS					-4.000
NPV					1.941

After calculating the present value of cash flows from credit sale at a discounted rate of 12% with days in a year taken at 365 days is calculated.

Since the NPV of credit sale is higher than that of cash sale, Credit sale should be encouraged.

The minimum increase in sale to justify credit sale should be such that the NPV of Credit sale is at least equal to NPV of Cash Sale

NPV	1.800
COGS	4.000
PV of Sale	5.800
Credit sale
Annual Sale	5*(1+x%)
	Collection from Sale
	30 days	60 days	90 days	Bad Debt
	5*(1+x%)*20%	5*(1+x%)*40%	5*(1+x%)*37%	5*(1+x%)*3%
Discount Rate	12%	Pa
PV=5.8=	5*(1+x%)*20%/(1+12%)^30/365	5*(1+x%)*40%/(1+12%)^60/365	5*(1+x%)*37%/(1+12%)^90/365	0
5.8=	5*(1+x%)*20%/(1+12%)^30/365+5*(1+x%)*40%/(1+12%)^60/365+5*(1+x%)*37%/(1+12%)^90/365
X=	15.92%

6.3

To calculate NPV for this decision we use the equation

NPV= (-C+(1-p)S + pRS ) * (1+r)

(1+r)^n (1+r)^m (p+r)

Putting the numbers, C = 800, p = .10, S = 1000, r = .0125, n = 1, R = .5, m = 3, we get

NPV= (-800+.9*1000 + .1*.5*1000 ) (1+.0125)

(1+.0125)^1 (1+.0125)^3 (.1+.0125)

=(-800+888.89+48.17)*9

=1234

As the NPV is positive Ashley can extend the credit to the customer.

6.4

The following equation to find the selling price of the portfolio,

NF + 12nB[(1 + r)−g/365 − 1] + mC(R − r) − L + 12aNS

Selling price = P +

r (6.10)

In the above expression, a = 0, P = 0, N = 10,000, F = $25, m = 10,000, n = 10,000, C =

$1200, B = $800, R = .15, r = .08, g = 25 days, L = $100,000. Putting these numbers, we find the selling price as follows.

NPV =10‚000(25) + 12(10‚000)(800)[1.08−25/365 − 1] + 10‚000(1200)(.15 − .08) − 100‚000

.08

=3.971

Since the amount offered by Mellon Bank at $5 mn is higher than the NPV of $3.971 of credit card portfolio, First National Bank of Jermyn should accept the offer.