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:
1. OPTIMUM TRANSFER AMOUNT
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:
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.
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
TOTAL ASSET TURNOVER 4
COST OF DEBIT 6.250%
PAR VALUE OF COMMON STOCK $100
VARIABLE COSTS 80.00%
FIXED COSTS $1,500,000
TAX RATE 34%
THE BALANCE OF EACH SCENARIO'S FUNDING WILL COME FROM COMMON STOCK.
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%
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%
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:
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.
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!)
The solution carefully explains and shows all the calculations to arrive at the proper answers to the questions.