WORKING CAPITAL

1) Consider the following financial statement for Mediate Corporati

Item Beginning Ending
Inventory $9780 $11380
Accounts Receivable 4108 4938
Accounts Payable 7636 7927
Credit Sales 89804
COGS 56384
Calculate the operating and cash cycle.

1
The operating cycle is the inventory period plus the receivables period

Inventory turnover ratio=COGS/Average Inventory

AVG Inventory 10580

Inventory turnover ratio= 56384/10580

5.3293005671

Inventory Period =365/5.329

Inventory period=68.49 days

Receivable turnover=Credit Sales /Average Receivables

89804/(4108+4938)/2

19.8549635198
 Receivables period =365/19.855

Operating cycle is 68.49+18.38

86.87

The cash cycle is the operating cycle minus the payables period. The payables t

Payables turnover ratio =COGS/Average payables

Payable period

Cash cycle

The firm is receiving cash on average 36.50 days after it pays its bil

2 Here are some important figures from the budget

Credit Sales
Credit Purchases
Cash disbursement
Wages, taxes, expenses
Interest
Equipment purchases

The company predicts that 5 per cent of its credit sales w

its sales will be collected in the month of the sale , and th
collected in the following month. Credit purchases will be
147000 purchase.In March 2009,credit sales were $245000 and c
this information , complete the following cash budget.

Beginning Cash balance

Cash receipts

Cash collections from credit sales

 Total cash available
Cash disbursements
Purchases
Wages, taxes, expenses
Interest
Equipment Purchases
Total cash disbursements
Ending cash balance

2
The sales collections each month will be :

Sales collection =0.35(current month sales) + 0.60( prevous month s

Given this collection, the cash budget will be :

BEGINNING CASH BALANCE

CASH RECEIPTS :
Cash Collection from credit sales

Total cash available

CASH DISBURSEMENTS

Purchases
Wages ,taxes &expenses
Interest
Equipment Purchases

Total cash disbursements

Ending cash balance

CASH AND LIQUIDITY MANAGEMENT

3 Your firm has an average receipt size of $108. A bank has approache
service that will decrease your total collection time by two days. You
day. The daily interest rate is 0.016. If the bank charges a fee of $225
918000 be accepted? What would the net annual savings be if the service w
179,285.76
 3 NPV and Collection Time

Average daily collections =108*8500

The present value of the lockbox service is the average da

PV= (2 day reduction*918000)

The daily cost is a perpetuity .The present value of the co

Since the NPV is positive the firm should take the lock bo

Net Annual savings if the service is adopted

Annual Savings excluding the cost would be the future va

Annual savings =1836000(1.00016)^365-1406250

4 Birds Eye Treehouses Inc a Kentucky company has determ

735000 therefore is considering using a lockbox system offered by
will reduce collection time by two days. Based on the foll
Average number of payments per day =750
Average Value of payment =$980
Variable lockbox fee (per transaction)=$0.35
Annual interest rate on money market securities =7%
How would your answer change if there were a fixed cha

Variable lockbox fee (per

transaction)=$0.35
Annual interest rate on money
market securities =7%
 How would your answer change
if there were a fixed charge of
$5000 per year in addition to the
variable charge ?

4 ANS To find the NPV of taking the lockbox , we first need to ca

value of the savings will be the reduction in collection tim

PV=2(750)(980)

PV=$1470000
Daily interest rate

Daily interest rate= 1.070^1/365-1

Daily interest rate =0.00019 or .019%

The transaction costs are a perpetuity .The cost per day is

so the NPV of taking the lockbox system is:

NPV=$1470000-[(0.35*750)/.00019]

0.35*750/0.00019

NPV
SO BASED ON THE INFORMATION , THE LOCKBOX SYSTEM

To calculate the NPV of the lock box with the annual fee,
the additional cost .The annual fee is a perpetuity ,so wit

NPV=88421.05-[5000/.07]

NPV

WITH THE FEE THE LOCKBOXSYSTEM CAN BE ACCEPTED

CREDIT AND INVENTORY MANAGEMENT

5

Devour Inc is considering a change in its cash only sales p

determine if Devour should proceed or not?. The require

Price per unit

Cost per unit
Unit Sales per month

Devour Inc

The cost of switching is the lost sales from the existing po

Cost of switching =720(1305)+495(1380-1305)

Cost of Switching =$976725

The benefit of switching =(720-495)(1380-1305)

The benefit of switching is a perpetuity ,so the NPV of the

The firm will have to bear the cost of sales for one mont
the intial cost is for one month.Receivables will grow ov
and new sales offsetting one another
ial statement for Mediate Corporation

h cycle.

plus the receivables period

68.4931506849

Receivables
 18.3832787711

days

the payables period. The payables turnover calculation

verage payables

7.2454381907

50.3765252554

36.493474745

rage 36.50 days after it pays its bills .

important figures from the budget of Nashville Nougats Inc for the second quarter of 2009:

April May June

$390,000 364000 438000
147800 176300 208500

53800 51000 78300

13100 13100 13100
87000 147000 0

that 5 per cent of its credit sales will never be collected, 35 per cent of
ed in the month of the sale , and the remaining 60 per cent will be
wing month. Credit purchases will be paid in the month following the
09,credit sales were $245000 and credit purchases were $168,000.Using
plete the following cash budget.

April May June

$140,000 $101,600 $104,100
136500 127400 153300

147000 234000 218400

 $423,500 $463,000 $475,800

168000 147800 176300

53800 51000 78300
13100 13100 13100
87000 147000 0
321900 358900 267700
$101,600 $104,100 $208,100

onth sales) + 0.60( prevous month sales)

udget will be :

APRIL MAY JUNE

140000 101600 104100

283500 361400 371700

423500 463000 475800

168000 147800 176300

53800 51000 78300
13100 13100 13100
87000 147000 0

321900 358900 267700

101600 104100 208100

size of $108. A bank has approached you concerning a lockbox

otal collection time by two days. You typically receive 8500 checks per
16. If the bank charges a fee of $225 per day, should the lockbox project
et annual savings be if the service were adopted ?
 ns =108*8500

918000

he lockbox service is the average daily receipts times the number of days , the collection is reduced

1836000

petuity .The present value of the cost is the daily cost divided by the daily interest rate .So

PV of cost =225/0.00016

1406250

NPV =1836000-1406250

429750
ve the firm should take the lock box service .

he service is adopted

ing the cost would be the future value of savings minus the costs , so

000(1.00016)^365-1406250

(1.00016)^365 1.060134014

540156.04983

Inc a Kentucky company has determined that a majority of its customers are located in the Pennyslvania area. It
ng using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system
time by two days. Based on the following information ,should the lockbox system be adopted ?
payments per day =750
yment =$980
(per transaction)=$0.35
on money market securities =7%
er change if there were a fixed charge of $5000 per year in addition to the variable charge ?
 ing the lockbox , we first need to calculate the present value of savings.The present
ill be the reduction in collection time times the average daily collection,so

1470000

070^1/365-1 0.0001853833

00019 or .019%

are a perpetuity .The cost per day is the cost per transaction times the number of transactions per day
he lockbox system is:

*750)/.00019]

1381578.947

88421.052632
ORMATION , THE LOCKBOX SYSTEM SHOULD BE ADOPTED

f the lock box with the annual fee, we can simply use the NPV of the lockbox without the annual fee and subtract
he annual fee is a perpetuity ,so with the fee , NPV of taking the lockbox is

16992.478571

CKBOXSYSTEM CAN BE ACCEPTED

ORY MANAGEMENT
ing a change in its cash only sales policy. The new terms of sale would be net one month .Based on the following information,
hould proceed or not?. The required return is 1.5 per cent per month.

Current Policy New Policy

$720 $720
$495 $495
1305 1380

s the lost sales from the existing policy plus the incremental variable costs under the new policy, so:

0(1305)+495(1380-1305) 976725

ng =(720-495)(1380-1305)

16875
ng is a perpetuity ,so the NPV of the decision to switch is :

NPV=-$976275+16875/0.015 16875/.015 1125000

148725
bear the cost of sales for one month before they receive any revenue from credit sales, which is why
ne month.Receivables will grow over the one month credit period and will then remain stable with payments
ng one another
g information,