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FIN 450 MODULE 5 PROBLEMS

FIN 450 MODULE 5 PROBLEMS

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P15-3-Multiple changes in cash conversion cycle- Garrett Industries turns over its inventory six times each year, it has an average collection period of 45 days and an average payment period of 30 days. The firm�s annual sales are $3 million. Assume that there is no difference in the investment per dollar of sales in inventory, receivables, and payables, and assume a 365-day year
P15-9-Accounts receivable changes with bad debt- A firm is evaluating an accounts change that would increase the bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per unit is $15. As a result of the proposed change, sales are forecasted to increase to 60,000 units
a) What are bad debts in dollars currently and under the proposed change?
b) Calculate the cost of managerial bad debt to the firm.
c) Ignoring the additional profit contributions from increased sales, if the proposed change saves $3,500 and causes no change in average investment in accounts receivable, would you recommend it? Explain.
d) Considering all changes in costs and benefits, would you recommend the proposed change? Explain.
c) Compare and discuss your answers in part c and d.
P15-12-Shortening the credit period- A firm is contemplating shorting its credit period from40 to 30 days and believers that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses are expected to decrease from 1.5% to 1% of sales. The firm is currently selling 12,000 units but believers that the sales will decline to 10,000 units as a result of the proposed changes. The sales price per unit is $56, and the variable cost per unit is $45. The firm has a required return on equal-risk investments of 25%. Evaluate this decision and make a recommendation of the firm. (Note; assume a 365-day year.
P15-16 Zero-balance account Union Company is considering establishment of a zero balanceaccount. The firm currently maintains an average balance of $420,000 in its disbursement account. As compensation to the bank for maintaining the zero balance account, the firm will have to pay a monthly fee of $1,000 and maintain a $300,000 non–interest-earning deposit in the bank. The firm currently has no other deposits in the bank. Evaluate the proposed zero-balance account, and make a recommendation to the firm, assuming that it has a 12% opportunity cost.
P16-6- Cash discount decision Prairie Manufacturing has four possible suppliers, all of which offers different credit terms. Except for the difference in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table. (Note a 365-day year)


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