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Working Captial Financial Problem

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1. Economic Order Quantity. A large consulting firm orders photocopying paper by the carton.
The firm pays a $30 delivery charge on each order. The total cost of storing the paper,
including forgone interest, storage space, and deterioration, comes to about $1.50 per carton
per month. The firm uses about 1,000 cartons of paper per month.

a. Fill in the following table:

b. Calculate the economic order quantity. Is your answer consistent with your findings in
part (a)?

2. Compensating Balances. The stated bank loan rate is 8 percent, but the loan requires a
compensating balance of 10 percent on which no interest is earned. What is the effective interest
rate on the loan? What happens to the effective rate if the compensating balance is
doubled to 20 percent?

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Solution Summary

The solution explains how to calculate the Economic Order Quantity and effective rate of interest with compensating balance

Solution Preview

The table is in the attached file. The answer that we get is consistent ...

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