Algebra Ltd is selling inventory management software for small to mid-size firms. Currently, the computer program is sold only for cash. In order to increase its revenues, the company is considering the alternative of offering a credit for one month to all of its customers. However, by providing customer credit, the company expects that it will incur the risk of attracting high-risk customers that could default on their payments. The two strategies are outlined below:

1 The $5 difference is unit cost reflects the cost of managing the credit policy
Algebra Ltd cost of capital is 1 percent per month
a. What is the net present value (NPV) of selling the computer program for cash?
b. What is the NPV selling the computer program on credit?
c. What should Algebra do?

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Unit Sales Price Quantity sold Cost per unit Probability of customer defaulting Cash-based sales S100 100 S50 0 percent Credit Sales $100 100 S551 10 percent