Keep M Flying is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy.
The variable cost is $1.7 million per unit, and the credit price is $2.1 million each. credit is extend for one period.
Based on historical experience, payment for about 1 out of every 240 such orders is never collected. The required return is 3.2 percent per period.
What is the default probability?
What is the NPV if this is a one-time order?
What is the NPV if this is repeat order?