How is the NPV of a credit policy switch calculated according to the chapter's content?

The NPV of a credit policy switch is calculated by determining the incremental cash inflow from increased sales, subtracting the costs associated with the switch, and then calculating the present value of the future cash flows. Specifically, the formula is: NPV = -[PQ + v(Q′ - Q)] + [(P - v)(Q′)]/R, where PQ is the sales revenue under the old policy, v(Q′ - Q) is the additional production cost, and (P - v)(Q′) is the incremental cash inflow from increased sales.

To calculate the NPV of switching credit policies, you first identify the incremental cash inflow resulting from the increase in quantity sold (Q′) under the new policy compared to the old policy (Q). The cash inflow is calculated as (P - v)(Q′ - Q). Next, you account for the costs of switching, which include the sales revenue that will not be collected immediately (PQ) and the additional production costs for the increased quantity sold (v(Q′ - Q)). The NPV is then derived from the formula: NPV = -[PQ + v(Q′ - Q)] + [(P - v)(Q′)]/R, where R is the required return. This formula allows you to assess whether the switch is financially beneficial by comparing the present value of future cash inflows to the costs incurred by the switch.