1.
Norton Wrench - credit standards tightening.
Current
Terms (E)
$275,000
$753.42
Sales per 365-day year
Sales per day, S
Sales growth rate, g
Up-front Variable Cost Ratio (VCR)
Collection expenses (EXP) at DSO
Bad debt expense ratio, b , at DSO
Discount percent, d
Discount period, days
Proportion taking discount, p
Non-discount period, days
k = company's annual nominal cost of capital
i = daily cost of capital
Proposed
Terms (N)
$255,000
$698.63
-7.27%
70.00%
1.25%
7.00%
0
0
0
56
70.00%
1.45%
7.00%
0
0
0
56
15%
15% / 365
=
4.1096%
a.) Cashflow timeline under current terms
Day 0
Day 56
---|-------------------------------------------------------------------------------------|----------->
Variable Costs = VCR x sales / day
($527.40)
= PV cash outflow / day
$675.72
= PV of cash inflow / day
$753.42 cash collected / day
($9.42) EXP / day
bad debt
($52.74)
loss/day
$691.27 total cash inflow / day
NPV =
𝑍𝐸 =
$148.32
per day from current terms
𝑆𝐸 (1 − 𝑑𝐸 )𝑝𝐸 (1 − 𝑏𝐸 ) 𝑆𝐸 (1 − 𝑝𝐸 )(1 − 𝑏𝐸 )
𝐸𝑋𝑃𝐸
+
− 𝑉𝐶𝑅(𝑆𝐸 ) −
(1 + 𝑖𝐷𝑃𝐸 )
(1 + 𝑖𝐶𝑃𝐸 )
(1 + 𝑖𝐶𝑃𝐸 )
In terms of the Ze formula:
Current Terms
1st term
PV from discount period
2nd term
PV from credit period
3rd term
PV variable costs
4th term
PV credit expenses
Ze
$0.00
no discount period
$684.92
($527.40)
($9.21)
=
$148.32
= NPV per day of current terms
b.) Cashflow timeline under proposed terms
Day 0
Day 56
---|----------------------------------------------------------------------------------|--------->
Variable Costs = VCR x sales / day
($489.04)
$698.63 cash collected / day
($10.13) EXP / day
($48.90) bad debt loss/day
= PV of cash outflow / day
$639.60 total cash inflow / day
$625.21
= PV of cash inflow per day
NPV =
$136.17
In terms of the Zn formula:
Proposed Terms
1st term
PV from discount period
2nd term
PV from credit period
3rd term
PV variable costs
4th term
PV credit expenses
c.)
$0.00 no discount period
$635.11
($489.04)
($9.90)
Zn
Therefore,  Z = Zn - Ze =
per day from proposed terms
=
$136.17
= NPV / day of proposed terms
($12.15)
Overall Value Effect ( NPV)
($29,571.27)
 NPV =  Z / I = 

This is the overall value effect assuming the daily NPV lasts indefinitely.
d.) Non-financial considerations
How customers react to the change will be important. While the estimate is that the firm
will lose about $30,000, the loss might be much greater, especially if competitors don't
change
3.
J. James Book Publishers -- cash discount consideration.
Sales per 365-day year
Sales per day, S
Sales growth rate, g
Up-front Variable Cost Ratio (VCR)
Collection expenses (EXP) at DSO
Bad debt expense ratio, b , at DSO
Discount percent, d
Discount period, days
Proportion taking discount, p
Non-discount period, days
k = company's annual nominal cost of capital
i = daily cost of capital = 10% / 365
Current
Terms (E)
$250,000,000
$684,931.51
Proposed
Terms (N)
$250,000,000
$684,931.51
0%
60.00%
5.00%
3.00%
0.00%
0
0.00%
40
60.00%
4.00%
3.00%
3.00%
10
40.00%
40
10%
0.0002740
Cashflow timeline under current terms
Day 0
---|-------------------------------------------------------------------------------|------------>
Day 40
Variable Costs = VCR x sales / day
$684,931.51 cash collected / day
($34,246.58) EXP / day
($20,547.95) bad debt loss / day
($410,958.90)
= PV of cash outflow / day
$630,136.99 total cash inflow / day
$623,306.23
= PV of cash inflow per day
NPV =
$212,347.33
per day from current terms
Current
Terms
In terms of the Ze formula
1st term
PV from discount period
2nd term
PV from credit period
3rd term
PV variable costs
4th terms
PV credit expenses
$0.00
no discount period
$657,181.57
($410,958.90)
($33,875.34)
Ze =
$212,347.33
= NPV per day of current terms
Cashflow timeline under proposed terms
Day 0
---|----------------------------------------|----------------------------
Day 10
Day 40
-------------|---------->
VCR x sales / day
($410,958.90)
= PV of cash outflow
per day
$257,780.82
$273,972.60 collections w/o discount
$265,753.42 (after discount of 3%)
$0.00 = credit collection expenses at Day 10
($7,972.60) bad debt losses
(based on after-discount cash collections)
$257,780.82 = total cash inflow / day from discount period
at Day 10
$257,076.50
= PV of cash inflow / day
$410,958.90 = cash / day
($27,397.26) = EXP / day
(based on before-discount cash
flow at Day 10 plus cash flow
at Day 40)
($12,328.77) = bad debt loss / day
$371,232.88 = total cash inflow / day from
non-discount period
$367,208.67
= PV of cash inflow / day
NPV =
$213,326.27
per day from proposed terms
In terms of the Zn formula
Proposed Terms
1st term
PV of discount period
$257,076.50
discounted from Day 10
2nd term
PV from credit period
3rd term
PV variable costs
4th terms
PV credit expenses
Zn
$394,308.94
($410,958.90)
($27,100.27)
=
$213,326.27
discounted from Day 40
at Day 0
discounted from Day 40
= NPV per day of current terms
a.) Calculating the one-day change in value
Therefore, the one-day change in value related to the proposed terms is  Z = Zn - Ze =
$978.94
per day
b.) Calculating the change in daily net present value
$3,573,137.41
 NPV =  Z / I = 

This is the overall (very positive) value effect assuming the daily NPV lasts indefinitely.
c.)
Recommendation
Yes, A. Walton should initiate the cash discount since it will increase shareholder wealth
assuming the forecasts are correct.
d.) The optimal cash discount percent.
Using the Hill-Riener optimal cash discount formula, the optimal cash discount
is:
0.4092%
from Equation 6-8 in the text.
Since this is less than 1/2 of 1%, on an integer basis it rounds to zero percent. Thus, no
cash discount would be implemented if this model is used. Caution the students that the
solution has some amount of inaccuracy because of the varying (decreasing) EXP which
violates the assumptions of the Hill-Riener formula.
4.
Optimal cash discount percentage
DP
5
10
10
10
a.)
b.)
c.)
d.)
5.
CP
75
30
45
30
I
0.15
0.12
0.18
0.22
Opt. Disc.
1.41758%
0.32763%
0.85540%
0.59894%
Besley, Inc. - aging schedule and DSO for previous 180 days.
Month
January
February
March
April
May
June (current)
Late
over 90
days
over 90
days
61-90 days
31-60 days
0-30 days
Total credit sales
Credit
Sales
Uncollected
Amount
Uncollected
Amount as
Percent of
June 30 A/R
$75,000
$5,000
11.90%
$50,000
$5,000
11.90%
$100,000
$40,000
$45,000
$50,000
$6,000
$6,000
$8,000
$12,000
14.29%
14.29%
19.05%
28.57%
$42,000
100.00%
$360,000
June 30 A/R Balance:
Age
Current
0 - 30
31 - 60
61 - 90
over 90
Month
A/R
June
$12,000
May
$8,000
April
$6,000
Avg. daily sales / 6-month period = sum of sales / 180 days =
DSO for the six-month period =
A/R turnover for the 6-month period =
March
$6,000
Feb. & Prior
$10,000
$2,000
per day
21 days
8.57 times
Total
$42,000