Locust Software sells computer training packages to its business customers at a price of $102. The cost of production (in present value terms) is $96. Locust sells its packages on terms of net 30 and estimates that about 5% of all orders will be uncollectible. An order comes in for 20 units. The interest rate is 1.5% per month. Required:
a-1. Calculate the profit or loss if this is a one-time order and sale will not be made unless credit is extended
a-2. Should the firm extend credit if this is a one-time order?
b. What is the break-even probability of collection?
c-1. Now suppose that if the customer pays this month's bill, they will place an identical order in each month indefinitely and can be safely assumed to pose no risk of default. Calculate the present value of the sale.
c-2. Should credit be extended?
d. What is the break-even probability of collection in the repeat-sales case?