How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask BK-CPA Your Own Question
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 933
Experience:  Owner of a CPA firm
36384704
Type Your Finance Question Here...
BK-CPA is online now
A new question is answered every 9 seconds

How can granting credit to a person or company with bad credit

This answer was rated:

How can granting credit to a person or company with bad credit still be a net present value investment?

BK-CPA :

Hello and thank you for your question.

BK-CPA :

You can take the net present value of most any future transaction measured in dollars...

BK-CPA :

If you charge a lot of interest and make the assumption that you are going to get paid back in full or to an extent, and especially across a lot of different loans so statistical indicators can help guide the way, you can have a net present value on your investment in loan(s) that is positive with respect to earnings. If you are predicting that you are going to lose money, then you can still have a positive net present value in your loans (you generally always will), but your earnings of course would be negative.

BK-CPA :

A return on investment calculation will sometimes use the present value of future cash in-flows and out-flows over time. If you set that net present value equal to zero by using an interest rate for discounting future transactions to present day values that sum to $0, then you can use that interest rate as an indicator of your internal rate of return on the investment.

BK-CPA :

I hope this is helpful. Thank you again!

BK-CPA and other Finance Specialists are ready to help you