Problem:
James Corporation is considering the credit application of a customer. The customer is expected to buy $5000 worth of material from James every month in future, and pay for it within a month. There is a 20% probability that the customer may default on his monthly payment. If that happens, then James will not be able to recover anything from the customer. The cost of capital to James is 12%. The cost of goods to James is 80% of its sales.
Requirement:
Find the following:
- The value of this customer to James.
- Decide if he should get credit.
Note: Please explain comprehensively and give step by step solution.