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Dennis Lasser has collected some information about a food wholesaler in order to estimate its cash conversion cycle. The accumulated information is given. What will Dennis find the cash conversion cycle to be? Inventory turnover = 10x Inventory conversion period = 365/10 = 36.5 days Receivables turnover = 20x Receivables collection period = 365/20 = 18.25 days Payables turnover = 25x Payables deferral period = 365/25 = 14.6 days =============
Cash Conversion Cycle
= Inventory conversion period + Receivables collection period - Payables deferral period
= 36.5+18.25-14.6 = 40.15 Days
Cost of bank loan A bank loan agreement calls for an interest rate equal to prime rate plus 1%. If prime rate averages 9% and non-interest-earning compensating balances equal to 10% of the loan must be maintained, what are the APR and the APY of the loan assuming annual payments?
APR/APY = [ Net cost of loan / Cash advance ] x m = [ (0.10 x $1) / ($1 - $0.10) ] x 1 = 11.11%
(Since information regarding compounding is not given APR and APY would be same)
NPV of granting credit A credit sale of $15,000 has a 95% probability of being repaid in two months and a 5% probability of a complete default. If the investment in the sale is $12,000 and the opportunity cost of funds is 15% per year, what is the NPV of granting credit?
NPV = Present value of Expected Value to be repaid - Investment Amount
= ((0.95 x $15,000) / (1 + 0.15)2 / 12) - $12,000
= 13,921.90 – 12,000
= $1,921.90
Alternative way
We can also solve it by entering following information in Financial calculator
N = 2/12 I = 15 PV = ? PMT = 0 FV = 0.95x15,000
PV = -13,921.90
= $1,921.90
Economic order quantity Knoxville Accountants LLP consumes 100,000 packets of plain copier paper annually. The usage is roughly constant throughout the year. The carrying cost of this inventory is $2.00 per unit average inventory per year. The ordering and delivery cost is a fixed $100 per order. What is the economic order quantity? How many orders will be placed per year using the EOQ? What is the average inventory level? What is the total annual inventory cost?
a. EOQ = Square root of (2*Ordering Cost*Annual Demand)/Carrying Cost)
EOQ = (2 x 100 x 100,000 / 2)1/2 = 3,162.28
b. Orders per year = Annual Demand /EOQ = 100,000 / 3,162.28 = 31.62
c. Average inventory = EOQ / 2 = 3,162.28 / 2 = 1,581.14
d. Total cost =Ordering cost + Carrying Cost= $100 x 31.62 + $2 x 1,581.14 = $6,324.28
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