# 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).

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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?

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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%

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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)

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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?

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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.