5/10/2017 AssignmentPrintView
1/9
Score: 6.67/20 Points 33.35 %
5/10/2017 AssignmentPrintView
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1. Award: 5 out of 5.00 points
CompanyXsellsona1/15,net60,basis.CustomerYbuysgoodswithaninvoiceof$1,500.
a. HowmuchcancompanyYdeductfromthebillifitpaysonday15?
Discount $15
b. HowmanyextradaysofcreditcancompanyYreceiveifitpassesupthecashdiscount?
Numberofdays 45 days
c. WhatistheeffectiveannualrateofinterestifYpaysontheduedateratherthanday15?(Use365
daysinayear.Donotroundintermediatecalculations.Enteryouranswerasapercentrounded
to2decimalplaces.)
Effectiveannualrate 8.41 %
References
Worksheet LearningObjective:20
02Measuretheimplicit
interestrateoncredit
sales.
CompanyXsellsona1/15,net60,basis.CustomerYbuysgoodswithaninvoiceof$1,500.
a. HowmuchcancompanyYdeductfromthebillifitpaysonday15?
Discount $
15±1%
b. HowmanyextradaysofcreditcancompanyYreceiveifitpassesupthecashdiscount?
Numberofdays
45
days
c. WhatistheeffectiveannualrateofinterestifYpaysontheduedateratherthanday15?(Use365
daysinayear.Donotroundintermediatecalculations.Enteryouranswerasapercentrounded
to2decimalplaces.)
Effectiveannualrate
8.49±1%
%
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be
usedforactualcalculations.
5/10/2017 AssignmentPrintView
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a.
Discount =.01×$1,500
=$15
b.
Extradays =60–15
=45days
c.
EAR=[1+(Discount/Discountedprice)](365/Extradaysofcredit)–1
=[1+(15/1,485)](365/45)–1
=.0849,or8.49%
5/10/2017 AssignmentPrintView
4/9
2. Award: 0 out of 5.00 points
Microbioticscurrentlysellsallofitsfrozendinnerscashondeliverybutbelievesitcanincreasesalesby
offeringsupermarkets1monthoffreecredit.Thepricepercartonis$100,andthecostpercartonis$65.
Theunitsaleswillincreasefrom1,050cartonsto1,110permonthifcreditisgranted.Assumeall
customerspaytheirbillsandtakefulladvantageofanycreditperiodoffered.
a. Iftheinterestrateis1%permonth,whatwillbethechangeinthefirm'stotalmonthlyprofitsona
presentvaluebasisifcreditisofferedtoallcustomers?(Donotroundintermediatecalculations.
Roundyouranswerto2decimalplaces.)
Changeintotalmonthlyprofit$37,750.99
b. Iftheinterestrateis1.5%permonth,whatwillbethechangeinthefirm'stotalmonthlyprofitsona
presentvaluebasisifcreditisofferedtoallcustomers?(Donotroundintermediatecalculations.
Roundyouranswerto2decimalplaces.)
Changeintotalmonthlyprofit$37,209.61
c. Assumetheinterestrateis1.5%permonthbutthefirmcanofferthecreditonlyasaspecialdealto
newcustomers,whileexistingcustomerswillcontinuetopaycashondelivery.Whatwillbethechange
inthefirm'stotalmonthlyprofitsonapresentvaluebasisundertheseconditions?(Donotround
intermediatecalculations.Roundyouranswerto2decimalplaces.)
Changeintotalmonthlyprofit$37,209.61
References
Worksheet LearningObjective:20
04Describehowfirms
assesstheprobability
thatacustomerwillpay
itsbills.
Microbioticscurrentlysellsallofitsfrozendinnerscashondeliverybutbelievesitcanincreasesalesby
offeringsupermarkets1monthoffreecredit.Thepricepercartonis$100,andthecostpercartonis$65.
Theunitsaleswillincreasefrom1,050cartonsto1,110permonthifcreditisgranted.Assumeall
customerspaytheirbillsandtakefulladvantageofanycreditperiodoffered.
a. Iftheinterestrateis1%permonth,whatwillbethechangeinthefirm'stotalmonthlyprofitsona
presentvaluebasisifcreditisofferedtoallcustomers?(Donotroundintermediatecalculations.
Roundyouranswerto2decimalplaces.)
Changeintotalmonthlyprofit$
1,000.99±1%
b. Iftheinterestrateis1.5%permonth,whatwillbethechangeinthefirm'stotalmonthlyprofitsona
presentvaluebasisifcreditisofferedtoallcustomers?(Donotroundintermediatecalculations.
Roundyouranswerto2decimalplaces.)
5/10/2017 AssignmentPrintView
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Changeintotalmonthlyprofit$
459.61±1%
c. Assumetheinterestrateis1.5%permonthbutthefirmcanofferthecreditonlyasaspecialdealto
newcustomers,whileexistingcustomerswillcontinuetopaycashondelivery.Whatwillbethechange
inthefirm'stotalmonthlyprofitsonapresentvaluebasisundertheseconditions?(Donotround
intermediatecalculations.Roundyouranswerto2decimalplaces.)
Changeintotalmonthlyprofit$
2,011.33±1%
Explanation:
Somevaluesbelowmayshowasroundedfordisplaypurposes,thoughunroundednumbersshouldbe
usedfortheactualcalculations.
Presentcashondeliveryprofit:
PVofprofits =PV(REV–COST)×Unitssold
=($100–65)×1,050
=$36,750
a.
1monthcreditataninterestrateof1%permonthonallsales:
PVofprofits =PV(REV–COST)×Unitssold
={[$100/(1+.01)]–$65}×1,110
=$37,750.99
Changeinmonthlyprofits =$37,750.99–36,750
=$1,000.99
Ataninterestrateof1%,theofferofcreditforonemonthincreasesthefirm’sprofits.
b.
1monthcreditataninterestrateof1.5%permonthonallsales:
PVofprofits =PV(REV–COST)×Unitssold
={[$100/(1+.015)]–$65}×1,110
=$37,209.61
ΔPVofprofits =$37,209.61–36,750
=$459.61
Ataninterestrateof1.5%,theofferofcreditforonemonthdecreasesthefirm’sprofits.
c.
1monthcreditataninterestrateof1.5%permonthfornewcustomersonly:
PVofprofits =PV(REV–COST)×UnitssoldOriginal+PV(REV–COST)×UnitssoldNew
=($100–65)×1,050+[($100/1.015)–$65]×60
=$38,761.33
ΔPVofprofits =$38,761.33–36,750
=$2,011.33
Ataninterestrateof1.5%,theofferofcredittonewcustomersincreasesthefirm’sprofits.
5/10/2017 AssignmentPrintView
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3. Award: 1.67 out of 5.00 points
OneachnondelinquentsaleCastIronreceives revenueswithapresentvalueof$1,260andincurscosts
withapresentvalueof $1,110.Assumethereisnopossibilityofrepeatordersandthattheprobability of
successfulcollectionfromthecustomerisp=.95.
a1. Whatistheexpectedprofitofgrantingcredit?(Anegativeamountshouldbeindicatedbyaminus
sign.Donotroundintermediatecalculations.Roundyouranswerto2decimalplaces.)
Expectedprofit $35.00persale
a2. ShouldCastIrongrantorrefusecredit?
n/r
b. Whatisthebreakevenprobabilityofcollection?(Enteryouranswerasapercentroundedto1
decimalplace.)
Breakevenprobability 88.0 %
References
Worksheet LearningObjective:20
04Decidewhetherit
makessensetogrant
credittocustomers.
OneachnondelinquentsaleCastIronreceivesrevenueswithapresentvalueof$1,260andincurscosts
withapresentvalueof$1,110.Assumethereisnopossibilityofrepeatordersandthattheprobability of
successfulcollectionfromthecustomerisp=.95.
a1. Whatistheexpectedprofitofgrantingcredit?(Anegativeamountshouldbeindicatedbyaminus
sign.Donotroundintermediatecalculations.Roundyouranswerto2decimalplaces.)
Expectedprofit $
87.00±1%
persale
a2. ShouldCastIrongrantorrefusecredit?
Grant
b. Whatisthebreakevenprobabilityofcollection?(Enteryouranswerasapercentroundedto1
decimalplace.)
Breakevenprobability
88.1±1%
%
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be
usedforactualcalculations.
a.
Profit(Loss) =[p×PV(REV–COST)–(1–p)×PV(COST)]
=[.95×($1,260–1,110)–(1–.95)×$1,110]
=$87.00
MAE
AEA
EAE
EEA
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tenrerccccrcreccercreccerres!
5/10/2017 AssignmentPrintView
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p=PV(COST)/PV(REV)
=$1,110/$1,260
=.881,or88.1%
5/10/2017 AssignmentPrintView
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4. Award: 0 out of 5.00 points
AnneTeak,thefinancialmanagerofafurnituremanufacturer,isconsideringoperatingalockboxsystem.
Sheforecaststhat300paymentsadaywillbemadetolockboxeswithanaveragepaymentsizeof
$2,000.Thebank’schargeforoperatingthelockboxesis$.40acheck.Theinterestrateis.011%perday.
a1. If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the
system.(Donotroundintermediatecalculations.)
Dailyinterestsaved $45
a2. Isitworthwhiletoadoptthesystem?
n/r
b. Whatminimumreductioninthetimetocollectandprocesseachcheckisneededtojustifyuseofthe
lockboxsystem?(Donotroundintermediatecalculations.Roundyouranswerto2decimal
places.)
Minimumreductionintime 99.00 days
References
Worksheet LearningObjective:20
06Comparethe
differenttechniquesthat
firmsusetomakeand
receivepayments.
AnneTeak,thefinancialmanagerofafurnituremanufacturer,isconsideringoperatingalockboxsystem.
Sheforecaststhat300paymentsadaywillbemadetolockboxeswithanaveragepaymentsizeof
$2,000.Thebank’schargeforoperatingthelockboxesis$.40acheck.Theinterestrateis.011%perday.
a1. If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the
system.(Donotroundintermediatecalculations.)
Dailyinterestsaved $
12±1%
a2. Isitworthwhiletoadoptthesystem?
Yes
b. Whatminimumreductioninthetimetocollectandprocesseachcheckisneededtojustifyuseofthe
lockboxsystem?(Donotroundintermediatecalculations.Roundyouranswerto2decimal
places.)
Minimumreductionintime
1.82±1%
days
5/10/2017 AssignmentPrintView
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Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be
usedforactualcalculations.
a.
Reductionincollectionfloat =Numberofpaymentsperday×Averagepaymentamount×Reductionincollectionfloatdays
=300×$2,000×2
=$1,200,000
Dailyinterestearnings =Reductionincollectionfloat×Dailyinterestrate
=$1,200,000×.00011
=$132
Dailycost =Numberofpaymentsperday×Costperpayment
=300×$.40
=$120
Netdailyadvantage =Dailyinterestearnings–Dailycost
=$132–120
=$12
Sincethenetdailyadvantageispositive,itisworthwhiletoadoptthesystem.
b.
Thebreakevenreductionnumberofdaysoccurswhenthenetdailyadvantageofthesystemiszero.
Netdailyadvantage=0 =Dailyinterestearnings–Dailycost
=[.00011×(300×$2,000×Days)]–(300×$.40)
Days=1.82
As long as the lockbox system reduces the collection delay by at least 1.82 days, the system is
worthwhile.
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