Alpha Inc. is a wholesaler that sells luxury cars. A new customer has placed an...
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Alpha Inc. is a wholesaler that sells luxury cars. A new customer has placed an order for six cars. The variable cost is $0.6 million per car, and the credit price is $0.87 million each. Credit is extended for one period. Based on experience, payment for about 1 out of every 200 such orders will be never collected. The discount rate is 2.5 percent per period.
a. If this is a one-time order, should it be filled? Calculate the break-even probability of default in this case.
b. Assuming that customers that do not default will become repeat customers and therefore they will place the same order every period forever. If the repeat customers never default, would the order be filled? Calculate the break-even probability of default in this case.
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