Share
Explore BrainMass

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

1.
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
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).

----------
2.

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?

----------

3.
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.

DEBT/ASSET RATIO

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

----------

4.
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)

----------

5.
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!)

Attachments

Solution Summary

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

$2.19