A potential new customer has submitted an order totaling $350,000 to a company. It has requested the company to extend credit for this order, with payment 30 days after delivery. The company’s contribution margin (price minus variable costs) on this order is 8.5%, and its fixed costs are not affected. The company will pay half of its costs for the order 15 days after the order is accepted, half of the remaining costs 30 days later, and the balance when the order is delivered, 75 days after acceptance. The company believes there is an 87.5% chance the customer will make payment on the order (i.e., a 12.5% chance the account will be uncollectible). If payment is not made when due, the company does not expect to be able to recover any of its costs. The company’s required return for this proposed transaction is 27.5%.
1. What are the company’s expected cash outflow from this order and when will they occur?
2. What is the company’s expected cash inflow from this order and when will it occur?
3. What is the company’s expected net present value of this order?
4. Should the company accept this order? Explain.