Credit and Inventory Management - Appendix Chapter 20 - A
Chapter
20 - A
Credit and Inventory Management -
Appendix
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McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter Outline
Appendix
• Alternative Credit Policy Analysis
The One-Shot Approach
The AR Approach
• Discounts and Default model
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Alternative Credit Policy
Analysis
The One-Shot Approach
Evaluate the benefit of a one-time switch in credit policy by calculating the NPV of the incremental cash flows
The Accounts Receivable Approach
Evaluate the NPV based on the cost of carrying receivables plus the incremental investment, relative to the benefit of the change
.
Both approaches provide the same NPV solution
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Discounts and Default
= percentage of credit sales that go uncollected d = percentage discount allowed for cash customers
P = credit price (no discount)
P = cash price = P (1 – d)
Assuming no change in Q, then:
Net incremental cash flow =
[(1 )P - v]Q – (P – v)Q = P Q(d )
NPV = -PQ + P Q(d )/R
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