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A. 1,500,000 daily collections x 2 days = 3,000,000 additional collections Invested at 9% = 3,000,000 x 9% = $270,000 per year If the cost is $200,000, then this is a good investment B.a) Incremental net income Additional sales Less: Uncollectible accounts (15% of new sales) Annual additional revenue Less: Production and selling costs (80%) Less: collection costs (2%) Additional before-tax income Less: Taxes (30%) Additional new income 2,000,000 300,000 1,700,000 1,600,000 40,000 60,000 18,000 42,000 b. Average investment in receivables Credit sales turnover = 2,000,000 additional sales/4 times a year of receivables turnover = $500,000 Incremental return on investment Additional net income/average investment = $42,000/$500,000 = 8.4% c. No, don’t enter the market because the return on investment is not as high as the minimum return on investment required by the company. d. 5 C’s of credit: Character, capital, capacity, conditions, collateral C.a. April = 33,088,000/41,467,000 = 80% May = 4%* June = 3% July = 14% *These numbers are rounded to the nearest percent. b. Average collection period = A/R divided by average daily credit sales = 41,467,000 = 41,467,000 = 26.3 days 189,000,000/120 1,575,000 c. Yes d. Potentially more satisfied because a clear majority is collected. The only concern is that 14% are most likely uncollectible. e. Provides more detail about the accounts and how they are collected D. a. Failing to take the discount = Discount % x 100% - Discount % 360 Final due date – Discount period = 2% 100% - 2% x 360 30-10 =2% x 18 = 36% b. Effective interest rate = Interest Principal First City = 360 20 400 x 40,000 x 360 Days Outstanding = .01 x 18 = 18% Upstart = 320 x 360 = .00806 x 18 = 14.5% 40,000 – 320* 20 *subtract the interest that is paid upfront for the discounting c. Use Upstart because it’s the lowest rate and borrow the money to take the discount. E.a. Total inventory Cost = Total Ordering + Total Carrying Cost Ordering = 75 x 4 = 300 Carrying = [Average inventory (50,000/2) + 200 safety stock] x $15 carrying cost = 25,200 x 15 = $378,000 Total Inventory Cost = $300 + 378,000 = $378,300 b. EOQ = 2SO = 2x200,000x75 √ C √ 15 = 1,414.20 = 1,414 c. Ave Inventory ( EOQ/2 = 1414/2 = 707 ) + Safety Stock of 200 = 907 d. Ordering Costs = 200,000 sales / 1414 EOQ ordering amount = 141 orders per year = 141 orders x $75 per order = $10,575 Carrying Costs = 907 ave inventory x $15 carrying cost = $13,605 Total Inventory Cost = 10,575 + 13,605 = $24,180* (*Note the difference from what the company currently pays in part a. That is the beauty of the EOQ idea of finding the most efficient amount of inventory to order at a time to minimize cost. Can you see why companies work hard to control inventory?) F. a. Effective Rate = Interest Principal – Compensating Balance x 360 Days Outstanding Interest = 1,000,000 x 10% = 100,000 (100,000/1,000,000 – 100,00) x 360/360 = 11.11% b. Effective Interest Rate = Interest x 360 Principal – Interest Days Outstanding = (100,000/1,000,000 – 100,000) x 360/360 = 11.11% c. Installment loan formula Effective Rate = 2x12x100,000 13 x 1,000,000 = 18.5% d. Subtract both interest and compensating balance from principal = 100,000 x 360 1,000,000 – 100,000 – 50,000 360 = 100,000/850,000 = 11.8% e. Amount to be borrowed = Amount Needed/ (1-c) = 1,000,000 / (1-10%) = $1,111,111 G. This could include using accounts receivable as collateral for a loan, selling accounts receivables (i.e. factoring), using inventory or work in progress as collateral, general borrowing, or using trade credit from suppliers. H. This could be anything. I. a. Remember that risk is higher with short-term loans because you are uncertain of what the rates will be in the future and you may not be able to get the money needed for a loan. With long-term loans, you lock in the money at a rate and the risk is therefore lower. That is why long-term loans are generally less expensive than short term loans. b. Generally, current assets are financed with current debt options listed in letter G. c. Generally, long term assets are financed with long term debt or equity. * * Check chapter 6 for problems illustrating this.