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 Cash based sales Credit Sales Unit Sales Price $100 $100 Quantity sold 100 100 Cost per unit $50 $55 1 Probability of customer defaulting 0 percent 10 percent 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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Question: 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

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:

	Cash-based sales	Credit Sales
Unit Sales Price	$100	$100
Quantity sold	100	100
Cost per unit	$50	$55¹
Probability of customer defaulting	0 percent	10 percent

¹The $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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