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    Cash Management: optimum transfer size, effective rate, EOQ, leverage, lease or buy

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    As Cash Manager, you have developed a model, which will help you in determining cash movement policies covering the transfer of investment funds into accounts used to pay company expenses. The model is based on the following data:

    a. Annual Cash Outlays $300,000
    b. Bank Fees for Moving Money $55.00
    c. Your Best Investment Rate 3.50%

    Calculate the following:

    Your optimum transfer size:

    Total transfers, average uninvested cash, transfer, opportunity, and total costs under each of the following four transfer amounts:

    2. $15,000
    3. $20,000
    4. $50,000

    Redo the model showing the impact of an increase in investment opportunity rate to 6%.

    (Show all work in both the original and recalculation of the data).


    a. A bank offers to finance your car. Here are the loan terms:
    Amount $35,000
    Term 4 year
    Annual Rate 5.00%
    Payment Discounted payable in equal installments

    Compute the effective rate you would pay on the loan
    Recompute the rate if the loan was not discounted.

    b. Your firm must maintain a compensating balance of 25>00% at it bank to borrow money. How much could it save in interest by changing to a bank that did not require the compensating balance given the following two scenarios:

    1. They were to borrow $250,000
    2. They needed to net $300,000
    In either case the bank charges 700% interest
    c. Your firm has a $25,000 optimum cash transfer amount. If transfer costs are $60 each and you could make 6.50% on your money, what are your total transactions demand for the year?

    d. With a fixed order cost of $90 and carrying costs of 8.00% of the $125 purchase price of your product, calculate the annual demand for your product if you operate an EOQ of 1000 units?

    e. A firm has annual sales revenue $6,500,000. You sell units at a price of $175 each. Your deliveries experience is as follows.
    Delivery# Days
    1 8
    2 7
    3 10
    4 7
    5 6

    What is your reorder point if your product requires 2 days to process at your site?


    You have been asked to evaluate the effect of borrowing (use of leverage) on
    your firm's profitability. You have the following information:

    TOTAL ASSETS $3,000,000
    COST OF DEBIT 6.250%


    FIXED COSTS $1,500,000
    TAX RATE 34%



    1 0.00%
    2 20.00%
    3 40.00%
    4 60.00%
    5 80.00%


    Your firm is interested in a truck to be used strictly for local delivery. You are considering leasing the fleet or purchasing it outright, and we have gathered the following data.

    PURCHASE PRICE $850,000
    DOWN PAYMENT 30.00%
    Loan Interest Rate 8.00%
    Term 6
    Investment Tax Credit 10.00%
    Annual Maintenance Contract $25,000
    Firm's Tax Rate 34.00%
    Book Salvage $85,000
    MACR 5 year class depreciation

    Lease Data $890,000
    Down Payment required 20.00%
    Lessor's Yield 16.00%
    Term 6
    Investment Tax Credit 2.00%
    Purchase Option $60,000

    Do you lease or buy? (Show all work)


    As Procurement Manager, you have designed a model which will assist you in managing inventory ordering and delivery processes, and buying strategies. The information below is the foundation for your calculations:

    a. Estimated Demand 75,000 units
    b. Purchase Cost $500 each
    c. Allocated Order Costs $95.00
    d. Carry Cost 3.00%

    Calculate the following:

    Your Economic Order Quantity (EOQ).

    Purchase, Ordering, Carrying and Total Inventory Costs, under the below situations:

    EOQ units
    300 units
    750 units
    1,200 units

    What would happen to your analysis if your order costs were to increase to $165.00?


    6. You are calculating a possible change in your firm's credit policy. You gathered the below information with which to make your decision.

    Current Proposed

    Credit Terms
    Discount 3% 1%
    Discount Days 10 days 20 days
    Net Days 20 days 40 days
    Sales $2,500,000 $2,275,000
    % Taking Discount 15% 15%
    % Paying Late 30% 20%
    No. of Days Late 15 days 5 days
    Variable Cost of Prod 70.00% 70.00%
    Fixed Costs $225,000 $225,000
    Cost of Money 6.00% 6.00%
    Collection Costs 1% of sales 2% of sales
    Bad Debts 2% of sales 1% of sales
    Tax Rate 36% 36%

    Should you switch from your current policy?

    *See attachment for clear formatting (I had trouble fitting it in here!)

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    Solution Summary

    The solution carefully explains and shows all the calculations to arrive at the proper answers to the questions.