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Examination of the Equivalent Relationship between the Two Credit Policy Decision Approaches: The Opportunity Cost and NPV Approaches

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  • Kim, Sang-Hoon
  • Feist, William R

Abstract

The net benefits resulting from credit policy decisions can be evaluated based on either the opportunity cost approach or the net present value (NPV) approach. It is known that the two approaches are equivalent in that they provide the same accept/reject decision. Consequently, most text books cover the opportunity cost approach which is much simpler to formulate. This paper reexamines the equivalent relationship based on the NPV models formulated under a capital budgeting framework, and shows that the equivalent relationship only holds for very restrictive conditions. Also, the discount rate for the NPV models is examined along with other models. Copyright 1995 by MIT Press.

Suggested Citation

  • Kim, Sang-Hoon & Feist, William R, 1995. "Examination of the Equivalent Relationship between the Two Credit Policy Decision Approaches: The Opportunity Cost and NPV Approaches," The Financial Review, Eastern Finance Association, vol. 30(4), pages 711-737, November.
    • Handle: RePEc:bla:finrev:v:30:y:1995:i:4:p:711-37
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    Cited by:

    1. Seifert, Daniel & Seifert, Ralf W. & Protopappa-Sieke, Margarita, 2013. "A review of trade credit literature: Opportunities for research in operations," European Journal of Operational Research, Elsevier, vol. 231(2), pages 245-256.
    2. Isaac Kwame Essien Obeng, 2016. "Delaying payments after the financial crisis: evidence from EU companies," MENDELU Working Papers in Business and Economics 2016-66, Mendel University in Brno, Faculty of Business and Economics.

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