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Finance Problems for a Furniture Manufacturer

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Anne Teak, the financial manager of a furniture manufacturer
A firm currently offers terms of sale of 3/20, net 40
As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio
Fill in the blanks in the following statements
A firm has a cash surplus
Sources and Uses of cash. State how each of the following events would affect the firm's balance sheet

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Solution Summary

The solution is a word document that show step by step solutions to Lock Box, Tax Credit Rates, Credit Policy, Short-term financial plans, and sources and uses of Cash problems.

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Please see the attached file.

a) if the lock box saves 2 days in collection float, is it worthwhile to adopt the system?

No of payments per day= 400
Average size of payment= $2,000
Rate of interest per day= 0.015%

Saving in days= 2
Increase in balance= $1,600,000 =400*2000*2

Invested at 0.015% the amount $1,600,000 gives a daily return of $240 =.015% * 1600000

Bank's charge for operating lock boxes= $0.40 a check

Total charge per day = $160 =$.4 * 400

Since return= $240 is greater than the cost= $160 it is worthwhile to adopt the system

b) What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system?

Return from per day saved with lock box:

Saving in days= 1
Increase in balance= $800,000 =400*2000*1

Invested at 0.015% the amount $800,000 gives a daily return of $120 =.015% * 800000

Thus , Return from per day saved with lock box= $120

Cost per day= $160 =$.4 * 400
(see part a)

Thus the minimum reduction in the time to collect and process each check needed to justify lock box system = 1.33 days =160/ 120

Answer: 1.33 days

Effective annual cost of foregoing cash discounts = [(1 + per period rate)^number of periods per year - 1] X 100 =

terms of sale of 3/20, net 40
Terms
Discount= 3%
Discount period= 20 days
Period after which the account becomes overdue= 40 days

Assume the payment is for $100.00
During the first 20 days you obtain a free ride on the seller's credit
If you do not take the cash discount, in effect you are borrowing the difference between the total amount billed
$100.and the amount of the cash discount $3. which, of course is $97.

Per period cost of loan
= dollar cash discount/dollar amount of loan= $3./ $97. = 3.09%

No of periods= 365 days/ (40days - 20days )= 18.25 periods

Effective annual cost of foregoing cash discounts =
= [(1 + per period rate)^number of ...

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