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Basic concepts in Finance

Question 1.

Part a) Assume the following facts about a firm:

Annual cost to maintain lock box $1,500
Cost to process each cheque $0.15
Average amount of each cheque received $1,500
Number of cheques received per year 4,000
Interest rate on borrowed funds 8.0%

How many days of float would a lock box system need to save to be justified?

Part b)

QWERTY Computer Manufacturing wants to price its new computer to earn a return of 60% on equity before interest and taxes. The computer has technological advantages that make management certain they can sell QWERTY's maximum production of 60,000 units per year at any reasonable price. The variable cost to build and sell a computer is $800, fixed costs are $5,500,000 per year, and the firm has $9,000,000 in its equity account. What is the minimum price QWERTY can sell the computer for and earn the return they want?

Solution Preview


Annual cost to maintain lock box =$1,500
Cost to process each cheque= $0.15
Number of cheques received per year =4,000
Annual Processing fees=0.15*4000=$600
Total Cost of Lock box=1500+600=$2100

Let us assume 300 working days in a year.
Average Number of ...

Solution Summary

There are two problems. Solution to first problem calculates the number of days of float that needed to save to justify the acceptance of lock box system in the given scenario. Solution to second problem depicts the steps to calculate price level that can earn the desired profit level.