B. WORKING CAPITAL MANAGEMENT THEORIES: Working capital anag!!nt 1. Working capital management involves investment and financing decisions related to: A. plant and equipment and current liabilities. B. current assets and capital structure. C. current assets and current liabilities. D. sales and credit. 17. Te goal of managing !orking capital" suc as inventor#" sould be to minimi$e te: A. costs of carr#ing inventor# B. opportunit# cost of capital C. aggregate of carr#ing and sortage costs D. amount of spoilage or pilferage Working capital "inancing polic# Aggressive %. &ap Compan# follo!s an aggressive financing polic# in its !orking capital management !ile &ing Corporation follo!s a conservative financing polic#. Wic one of te follo!ing statements is correct' A. &ap as lo! ratio of sort(term debt to total debt !ile &ing as a ig ratio of sort( term debt to total debt. B. &ap as a lo! current ratio !ile &ing as a ig current ratio. C. &ap as less liquidit# risk !ile &ing as more liquidit# risk. D. &ap finances sort(term assets !it long(term debt !ile &ing finances sort(term assets !it sort(term debt. ). Wic of te follo!ing !ould increase risk' A. *aise te level of !orking capital. B. Decrease te amount of inventor# b# formulating an effective inventor# polic#. C. +ncrease te amount of sort(term borro!ing. D. +ncrease te amount of equit# financing. Conservative ,. As a compan# becomes more conservative !it respect to !orking capital polic#" it !ould tend to ave a-n. A. +ncrease in te ratio of current liabilities to noncurrent liabilities. B. +ncrease in te operating c#cle. C. Decrease in te operating c#cle. D. +ncrease in te ratio of current assets to current liabilities. /oderate 0. 1ort(term financing plans !it ig liquidit# ave: A. ig return and ig risk B. moderate return and moderate risk C. lo! profit and lo! risk D. none of te above T!porar# $ P!ran!nt %orking capital 2. Temporar# !orking capital supports A. te cas needs of te compan#. C. acquisition of capital equipment. B. pa#ment of long term debt. D. seasonal peaks. Ca&' Manag!!nt /otives for olding cas 7. Te transaction motive for olding cas is for: A. a safet# cusion C. compensating balance requirements B. dail# operating requirements D. none of te above 3loat 4. Te difference bet!een te cas balance on te firm5s books and te balance so!n on te bank statement is called: A" te compensating balance C. a safet# cusion B. float D. none of te above Cas conversion c#cle 6. Te lengt of time bet!een pa#ment for inventor# and te collection of cas is referred to as: A. pa#ables deferral period C. operating c#cle B. receivables conversion period D. cas conversion c#cle 17. As a firm5s cas conversion c#cle increases" te firm: A. becomes less profitable 124 Financial Management (B. Working Capital Management) B. increases its investment in !orking capital C. reduces its accounts pa#able period D. incurs more sortage costs 11. Te longer te firm5s accounts pa#able period" te: A. longer te firm5s cas conversion c#cle is. B. sorter te firm5s inventor# period is. C. more te dela# in te accounts receivable period. D. less te firm must invest in !orking capital. 1,. Te average lengt of time a peso is tied up in current asset is called te: A. net !orking capital. C. receivables conversion period. B. inventor# conversion period. D. cas conversion period. R!c!i(a)l!& anag!!nt 10. All of tese factors are used in credit polic# administration e8cept: A. credit standards C. peso amount of receivables B. terms of trade D. collection polic# 12. Wic of te follo!ing statements is most correct' +f a compan# lo!ers its D19" but no canges occur in sales or operating costs" ten: A. te compan# migt !ell end up !it a iger debt ratio. B. te compan# migt !ell end up !it a lo!er debt ratio. C. te compan# !ould probabl# end up !it a iger *9:. D. te compan#5s total asset turnover ratio !ould probabl# decline. 1%. All but !ic of te follo!ing is considered in determining credit polic#' A. Credit standards C. Accounts pa#able deferral period B. Credit limits D. Collection efforts In(!ntor# anag!!nt 1). Te use of safet# stock b# a firm !ill: A. reduce inventor# costs C. ave no effect on inventor# costs B. increase inventor# costs D. none of te above 14. Wen a specified level of safet# stock is carried for an item in inventor#" te average inventor# level for tat item A. decreases b# te amount of te safet# stock. B. is one(alf te level of te safet# stock. C. +ncreases b# one(alf te amount of te safet# stock. D. +ncreases b# te number of units of te safet# stock. 16. Wic of te follo!ing statements is correct for a firm tat currentl# as total costs of carr#ing and ordering inventor# tat are %7; iger tan total carr#ing costs' A. Current order si$e is greater tan optimal B. Current order si$e is less tan optimal C. <er unit carr#ing costs are too ig D. Te optimal order si$e is currentl# being used Tra*! cr!*it ,7. Wit credit terms of 0=4" n=07" !at is te customer>s pa#ment decision date' A. Tree da#s after te invoice is received. B. Te 4t da# is te customer>s decision date. C. An#time during te period" 4t to te 07t. D. Te 07t da# is te primar# decision date. PROBLEMS Working capital "inancing i . Casie Compan# turns out ,77 calculators a da# at a cost of <,%7 per calculator for materials and variable conversion cost. +t takes te firm 14 da#s to convert ra! materials into calculator. Casie>s usual credit terms e8tended to its customers is 07 da#s" and te firm generall# pa#s its suppliers in ,7 da#s. +f te foregoing c#cles are constant" !at amount of !orking capital must Casie Compan# finance' A. <1"277"777 C. < 677"777 B. <,"277"777 D. <1"477"777 Ca&' con(!r&ion c#cl! ii . ?uke Compan# as an inventor# conversion period of )7 da#s" a receivables conversion period of 2% da#s" and a pa#ments c#cle of 07 da#s. Wat is te lengt of te firm>s cas conversion c#cle' A. 67 da#s C. %2 da#s B. 7% da#s D. 17% da#s 125 Financial Management (B. Working Capital Management) iii . Te 1pades Compan# as an inventor# conversion period of 7% da#s" a receivables conversion period of 04 da#s" and a pa#able pa#ment period of 07 da#s. Wat is te lengt of te firm>s cas conversion c#cle' A. 40 da#s C. )7 da#s B. 110 da#s D. 2% da#s iv . 1amaritan 1upplies" +nc. as <% million in inventor# and <, million in accounts receivable. +ts average dail# sales are <177"777. Te compan# as <1.% million in accounts pa#able. +ts average dail# purcases are <%7"777. Wat is te lengt of te compan#>s cas conversion period' A. %7 da#s C. 07 da#s B. ,7 da#s D. 27 da#s Da#s inventor# v . Wat is te inventor# period for a firm !it an annual cost of goods sold of <4 million" <1.% million in average inventor#" and a cas conversion c#cle of 7% da#s' A. ).%) da#s C. %,.)7 da#s B. 14.7% da#s D. )7.%7 da#s vi . 1amaritan 1upplies" +nc. as <% million in inventor# and <, million in accounts receivable. +ts average dail# sales are <177"777. Te compan# as <1.% million in accounts pa#able. +ts average dail# purcases are <%7"777. Wat is te lengt of te compan#>s inventor# conversion period' A. %7 da#s C. 1,7 da#s B. 67 da#s D. 27 da#s Ca&' anag!!nt :conomic conversion quantit# -:C@. vii . 1imile +nc. as a total annual cas requirement of <6"77%"777 !ic are to be paid uniforml#. 1imile as te opportunit# to invest te mone# at ,2; per annum. Te compan# spends" on te average" <27 for ever# cas conversion to marketable securities. Wat is te optimal cas conversion si$e' A. <)7"777 C. <2%"777 B. <%%"777 D. <7,"%77 9pportunit# cost viii . A#perbole Corporation estimates its total annual cas disbursements of <0",%1",%7 !ic are to be paid uniforml#. A#perbole as te opportunit# to invest te mone# at 6; per annum. Te compan# spends" on te average" <,% for ever# cas conversion to marketable securities and vice versa. Wat is te opportunit# cost of keeping cas in te bank account' A. <0"4,%.77 C. <2"167.77 B. <1"61,.%7 D. < 144.%% Annual savings i8 . Wat are te e8pected annual savings from a lock(bo8 s#stem tat collects 1%7 cecks per da# averaging <%77 eac" and reduces mailing and processing times b# ,.% and 1.% da#s respectivel#" if te annual interest rate is 7;' A. < %",%7 C. < ,1"777 B. < 10"1,% D. <077"777 R!c!i(a)l!& anag!!nt Carr#ing cost 8 . Te Camp Compan# as an inventor# conversion period of )7 da#s" a receivable conversion period of 07 da#s" and a pa#able pa#ment period of 2% da#s. Te Camp>s variable cost ratio is )7 percent and annual fi8ed costs of <)77"777. Te current cost of capital for Camp is 1,;. +f Camp>s annual sales are <0"07%"777 and all sales are on credit" !at is te firm>s carr#ing cost on accounts receivable" using 0)7 da#s #ear' A. <,41",%7 C. < ,7",%7 B. <1)4"7%7 D. < %)",%7 Average receivables 8i . CaBa Compan# sells on terms 0=17" net 07. Total sales for te #ear are <677"777. 3ort# percent of te customers pa# on te tent da# and take discountsC te oter )7 percent pa#" on average" 2% da#s after teir purcases. Wat is te average amount of receivables' A. <77"777 C. <77",77 B. <77"%77 D. <)7"%77 8ii . <alm Compan#>s budgeted sales for te coming #ear are <27"%77"777 of !ic 47; are e8pected to be credit sales at terms of n=07. <alm estimates tat a proposed rela8ation of credit standards !ill increase credit sales b# ,7; and increase te average collection period from 07 da#s to 27 da#s. Based on a 0)7(da# #ear" te proposed rela8ation of credit to 126 Financial Management (B. Working Capital Management) standards !ill result in an e8pected increase in te average accounts receivable balance of A. < %27"777 C. <,"777"777 B. < 677"777 D. <1"),7"777 +nvestment in receivables 8iii . Currentl#" ?a Carlota Compan# as annual sales of <,"%77"777. +ts average collection period is 2% da#s" and bad debts are 0 percent of sales. Te credit and collection manager is considering instituting a stricter collection polic#" !ereb# bad debts !ould be reduced to 1.% percent of total sales" and te average collection period !ould fall to 07 da#s. Ao!ever" sales !ould also fall b# an estimated <077"777 annuall#. Dariable costs are 7% percent of sales and te cost of carr#ing receivables is 17 percent. Assume a ta8 rate of 27 percent and 0)7 da#s per #ear. Wat !ould be te decrease in investment in receivables if te cange !ere made' A. < 6")44 C. < 6)"47% B. < 1,"644 D. <1,6"67% Compreensive @uestion Eos. 12 troug 1) are based on te follo!ing data: 1onata Compan# is considering canging its credit terms from ,=1%" net 07 to 0=17" net 07 in order to speed collections. At present" 27 percent of 1onata Compan#Fs customers take te , percent discount. Gnder te ne! term" discount customers are e8pected to rise to %7 percent. *egardless of te credit terms" alf of te customers !o do not take te discount are e8pected to pa# on time" !ereas te remainder !ill pa# 17 da#s late. Te cange does not involve a rela8ation of credit standardsC terefore bad debt losses are not e8pected to rise above teir present , percent level. Ao!ever" te more generous cas discount terms are e8pected to increase sales from <, million to <,.) million per #ear. 1onata Compan#>s variable cost ratio is 7% percent" te interest rate on funds invested in accounts receivable is 6 percent" and te firm>s income ta8 rate is 27 percent. 8iv . Wat are te da#s sales outstanding -D19. before and after te cange of credit polic#' A. ,7.7 da#s and ,,.% da#s" respectivel# C. ,,.% da#s and ,1.% da#s" respectivel# B. ,,.% da#s and ,7.7 da#s" respectivel# D. ,1.% da#s and ,,.% da#s respectivel# 8v . Te incremental carr#ing cost on receivable is A. < 420.7% C. < )20.7% B. <4"446.77 D. <)"))7.77 8vi . Te incremental after ta8 profit from te cange in credit terms is A. <)4"260 C. <)7")1% B. <)%")27 D. <%7")1% In(!ntor# anag!!nt :9@ 8vii . Wat is te economic order quantit# for te follo!ing inventor# polic#: A firm sells 0,"777 bags of premium sugar per #ear. Te cost per order is <,77 and te firm e8periences a carr#ing cost of <7.47 per bag. A. ,"777 bags C. 4"777 bags B. 2"777 bags D. 1)"777 bags Annual demand 8viii . /arsman Co. as determined te follo!ing for a given #ear: :conomic order quantit# -standard order si$e. %"777 units Total cost to place purcase orders for te #ear <27"777 Cost to place one purcase order < 177 Cost to carr# one unit for one #ear < 2 Wat is /arsman>s estimated annual usage in units' A. 1"777"777 C. %77"777 B. ,"777"777 D. 1"%77"777 *equired annual return on investment +i+ . B+B9 Compan# is a distributor of videotapes. <irate /art is a local retail outlet !ic sells blank and recorded videos. <irate /art purcases tapes from B+B9 Compan# at <077.77 per tapeC tapes are sipped in packages of ,7. B+B9 Compan# pa#s all incoming freigt" and <irate /art does not inspect te tapes due to B+B9 Compan#5s reputation for ig qualit#. Annual demand is 172"777 tapes at a rate of 2"777 tapes per !eek. <irate /art earns ,7; on its cas investments. Te purcase(order lead time is t!o !eeks. Te follo!ing cost data are available: *elevant ordering costs per purcase order <47 <67.%7 Carr#ing costs per package per #ear 0 *elevant insurance" materials andling" breakage" etc." per #ear , < 2.%7 Wat is te required annual return on investment per package' A. <)"777 C. <1",77 B. < ,%7 D. < )77 127 Financial Management (B. Working Capital Management) 9rder quantit# 88 . 3or *a! /aterial ?1," a compan# maintains a safet# stock of %"777 pounds. +ts average inventor# -taking into account te safet# stock. is 1,"777 pounds. Wat is te apparent order quantit#' A. 14"777 lbs. C. 12"777 lbs. B. )"777 lbs. D. ,2"777 lbs 9ptimal safet# stock level 88i . :ac stockout of a product sold b# Arnis Co. costs <1"7%7 per occurrence. Te compan#>s carr#ing cost per unit of inventor# is <% per #ear" and te compan# orders 1"%77 units of product ,7 times a #ear at a cost of <177 per order. Te probabilities of a stockout at various levels of safet# stock are: Gnits of 1afet# 1tock <robabilit# of 1tockout 7. 7.%7 177. 7.07 ,77. 7.12 077. 7.7% 277. 7.71 Te optimal safet# stock level for te compan# based on te units of safet# stock level above is A. ,77 units C. 177 units B. 077 units D. 277 units 88ii . <aeng Compan# uses te :9@ model for inventor# control. Te compan# as an annual demand of %7"777 units for part number )77, and as computed an optimal lot si$e of )",%7 units. <er(unit carr#ing costs and stockout costs are <6 and <2" respectivel#. Te follo!ing data ave been gatered in an attempt to determine an appropriate safet# stock level: Gnits 1ort Because of :8cess Demand during te ?ead Time <eriod Eumber of Times 1ort in te last 27 *eorder C#cles 177 4 ,77 17 077 12 277 4 Wat is te optimal safet# stock level' A. 177 units C. ,77 units B. 077 units D. 277 units Annual inventor# costs 88iii . Durable 3urniture Compan# uses about ,77"777 #ards of a particular fabric eac #ear. Te fabric costs <,% per #ard. Te current polic# is to order te fabric four times a #ear. +ncremental ordering costs are about <,77 per order" and incremental carr#ing costs are about <7.7% per #ard" muc of !ic represents te opportunit# cost of te funds tied up in inventor#. Ao! muc total annual costs are associated !it te current inventor# polic#' A. <16"%%7 C. <04"077 B. <14"7%7 D. <),"%77 /a8imum interest rate 88iv . Earra Compan# is considering a s!itc to level production. Cost efficiencies !ill occur under level production and after ta8 cost !ould decline b# <77"777 but inventor# !ould increase from <1"777"777 to <1"477"777. Earra !ould ave to finance te e8tra inventor# at a cost of 17.% percent. Wat is te ma8imum interest rate tat makes level production feasible' A. 7.77 percent C. 4.7% percent B. %.40 percent D. 17.77 percent 9pportunit# cost 88v . Diesel 3asion estimates tat 67"777 $ippers !ill be needed in te manufacture of ig selling products for te coming #ear. +ts supplier quoted a price of <,% per $ipper. Diesel planned to purcase 7"%77 units per mont but its supplier could not guarantee tis deliver# scedule. +n order to ensure availabilit# of tese $ippers" Diesel is considering te purcase of all tese 67"777 units on Hanuar# 1. Assuming Diesel can invest cas at 1,;" te compan#>s opportunit# cost of purcasing te 67"777 units at te beginning of te #ear is A. <1,7"%77 C. <1,0"7%7 B. <10%"777 D. <,)2"777 Tra*! cr!*it 88vi . +f a firm is given a trade credit terms of ,=17" net 07" ten te cost to te firm failing to take te discount is: A. ,.7;. C. 0).7; B. 07.7;. D. 17.7;. 88vii . Te cost of discounts missed on credit terms of ,=17" n=)7 is 128 Financial Management (B. Working Capital Management) A. ,.7 percent C. 1,.2 percent B. 12.6 percent D. ,1., percent Bank loan& Discount loan 88viii . Iou plan to borro! <17"777 from #our bank" !ic offers to lend #ou te mone# at a 17 percent nominal" or stated" rate on a one(#ear loan. Wat is te effective interest rate if te loan is a discount loan' A. 17.77; C. 1,.2%; B. 11.11; D. 12.%); Discount loan !it compensating balance 88i8 . Wat is te effective rate of a 1%; discounted loan for 67 da#s" <,77"777" !it 17; compensating balance' Assume 0)7 da#s per #ear. A. ,7.7; C. 17.2; B. 1%.7; D. ,,.,; Compensating balance !it interest 888 . Te <remiere Compan# obtained a sort(term bank loan for <1"777"777 at an annual interest rate 1,;. As a condition of te loan" <remiere is required to maintain a compensating balance of <077"777 in its cecking account. Te cecking account earns interest at an annual rate of 0;. <remiere !ould oter!ise maintain onl# <177"777 in its cecking account for transactional purposes. <remiere>s effective interest costs of te loan is A. 1,.77; C. 1).07; B. 12.,%; D. 1%.4); Add(on 888i . <erlas Compan# borro!ed from a bank an amount of <1"777"777. Te bank carged a 1,; stated rate in an add(on arrangement" pa#able in 1, equal montl# installments. A. ,,.1%; C. ,%.7%; B. ,2.77; D. 1,.77; ,inancing alt!rnati(! 888ii . A compan# as accounts pa#able of <% million !it terms of ,; discount !itin 1% da#s" net 07 da#s -,=1% net 07.. +t can borro! funds from a bank at an annual rate of 1,;" or it can !ait until te 07t da# !en it !ill receive revenues to cover te pa#ment. +f it borro!s funds on te last da# of te discount period in order to obtain te discount" its total cost !ill be A. < %1"777 less C. < 7%"%77 less B. <177"777 less D. < ,2"%77 more 888iii . :ver# 1% da#s a compan# receives <17"777 !ort of ra! materials from its suppliers. Te credit terms for tese purcases are ,=17" net 07" and pa#ment is made on te 07t da# after eac deliver#. Tus" te compan# is considering a 1(#ear bank loan for <6"477 -64; of te invoice amount.. +f te effective annual interest rate on tis loan is 1,;" !at !ill be te net peso savings over te #ear b# borro!ing and ten taking te discount on te materials' A. <0"),2 C. <2"477 B. <1"17) D. <1",,2 888iv . An invoice of a <177"777 purcase as credit terms of 1=17" n=27. A bank loan for 4 percent can be arranged at an# time. Wen sould te customer pa# te invoice' A. <a# on te 1st. C. <a# on te 27t B. <a# on te 17t D. <a# on te )7t 888v . Te <eninsula Commercial Bank and +sland Corporation agreed to te follo!ing loan proposal: 1tated interest rate of 17; on a one(#ear discounted loanC and 1%; of te loan as compensating balance on $ero(interest current account to be maintained b# +sland Corporation !it <eninsula Commercial Bank. Te loan requires a net proceeds of <1.% million. Wat is te principal amount of loan applied for as part of te loan agreement' A. <1")))"))7 C. <1"7)2"77) B. <,"777"777 D. <1"1,%"777 129 i . Ans!er: A Dail# !orking capital required: ,77 8 ,%7 %7"777 Total !orking capital needed: ,4 da#s 8 %7"777 1"277"777 CCC J 14 K 07 L ,7 ,4 da#s ii . Ans!er: B Cas Conversion C#cle J Ave. collection period K +nventor# c#cle da#s L Ave. Accounts <a#able pa#ment da#s +nventor# c#cle in da#s )7 da#s Average collection period 2% da#s 9perating c#cle 17% da#s Deduct Accounts pa#able pa#ment da#s 07 da#s Cas conversion c#cle 7% da#s iii . Ans!er: A +nventor# c#cle in da#s 7% da#s Average collection period 04 da#s 9perating c#cle 110 da#s Deduct Accounts pa#able pa#ment da#s 07 da#s Cas conversion c#cle 40 da#s iv . Ans!er: D +nventor# conversion period -1ee M2. %7.7 da#s Average collection period -,/=7.1/. ,7.7 da#s 9perating c#cle 77.7 da#s ?ess: Ave. Accounts <a#able pa#ment da#s -1.%/=7.%/. 07.7 da#s Cas conversion period 27.7 da#s v . Ans!er: D +nventor# turnover: Cost of goods sold=Ave. +nventor# -4/=1.%/. %.008 +nventor# conversion period -0)7 da#s=%.00. )7.% da#s vi . Ans!er: A Annual sales 0)7 da#s 8 177"777 0).7/ +nventor# turnover 0)/=%/ 7.,8 +nventor# conversion period 0)7=7., %7.7 da#s vii . Ans!er: B 9ptimal cas conversion si$e J -6"77%"777 8 27 = 7.,2.N1=, J %%"777 viii . Ans!er: B 9T1: -, 8 <0",%1",%7 8 <,% O 7.76.N1=, J <2,"%77 9pportunit# cost: <2,"%77 O , 8 7.76 < 1"61,.%7 ix . Ans!er: C *eduction in cas float -,.% K 1.%. 2.7 da#s Additional free cas -2 da#s 8 1%7 8 <%77. <077"777 Annual savings -<077"777 8 7.77. < ,1"777 x . Ans!er: C Average A* 0"07%"777=0)7 8 07 da#s ,41",%7 Average investment: ,41",%7 8 7.)7 1)4"7%7 Carr#ing cost: 1)4"7%7 8 7.1, ,7",%7 xi . Ans!er: B D19 J -.2 8 17. K -.)7 8 2%. 01 da#s Average A*: 677"777=0)7801 da#s <77"%77 xii . Ans!er: D Credit sale J 27"%77"777 8 47; J 0,"277"777 +ncreased credit sales: 0,"277"777 8 1., J 04"447"777 Ee! Average A* 04"447"777=0)7 8 27 J 2"0,7"777 9ld Average A* 0,"277"777=0)7 8 07 J ,"777"777 +ncrease in Average A* 1"),7"777 xiii . Ans!er: C Cange in average accounts receivables: <lanned: ,",77"777=0)7807 140"000 <resent: ,"%77"777=0)782% 01,"%77 Decrease in A* balance 1,6"))7 Dariable cost ratio 7%; Decrease in investment in A* 6)"47% xiv . Ans!er: A Da#s> sales outstanding 9ld polic#: -.2 8 1%. K -.0 8 07. K -.0 8 27. ,7.7 da#s Ee! polic# -.% 8 17. K -.,% 8 07. K -.,% 8 27. ,,.% da#s xv . Ans!er: A Average receivable Ee! polic#: ,.)/=0)7 8 ,,.% 1),"%77 9ld polic#: ,.7/=0)7 8 ,7 1%7"777 +ncremental Accounts *eceivable 1,"%77 +ncremental carr#ing cost on receivable 1,"%77 8 7.7% 8 7.76 420.7% xvi . Ans!er: A +ncremental sales )77"777 Dariable cost -.7% 8 )77"777. - 2%7"777. Additional bad debts -)77"777 8 ,;. - 1,"777. Additional carr#ing cost - 422. Additional discounts -,")77"777 8 .% 8 70. L-,"777"777 8 .2 8 .7,. - ,0"777 . Before ta8 increase in income 112"1%) ?ess ta8 2%"))0 +ncremental income )4"260 xvii . Ans!er: B :9@ J -, 8 0,"777 8 ,7 7.4.N1=, J 2"777 bags xviii . Ans!er: B Eumber of orders made 27"777=177 277 Annual requirement 277 8 %"777 ,"777"777 xix . Ans!er: C +nvestment in 1 package -,7 8 <077. <)"777 *equired annual return: <)"777 8 7., <1",77 xx . Ans!er: C Average inventor# units 1,"777 ?ess safet# units %"777 Average inventor# based on :9@ 7"777 9rder si$e 7"777 8 , 12"777 xxi . Ans!er: D 1afet# stock1tock out Costs -1.Carr#ing Costs P <%Total17717"%77%77<11"777,772"6771"777%"6770771"7%71"%770",%72770%7,"777,"0%7 1tockout Costs 177 17%7 8 .07 8 ,7 orders J 17"%77 ,77 17%7 8 .7% 8 ,7 J 2"677 077 17%7 8 .7% 8 ,7 J 17%7 277 17%7 8 .71 8 ,7 J 0%7 9ptimal safet# stock is 277(unit level !it a cost of onl# <,"0%7 cost. xxii . Ans!er: B Te optimal safet# stock level represents te level tat gives te lo!est sum of stock out costs and additional carr#ing costs. Based on te computation belo!" te lo!est combined costs is <0"027" corresponding to 077(unit level 3irst compute te stockout costs based on given probabilit# of demand. 1tarting !it 177(unit level as safet# stock" if te additional demand is ,77" te compan# as stockout of 177 units. 177: -177 8 0,Q 8 7.,%. K -,77 8 0, 8 7.0%. K -077 8 0, 8 7.,7. K -177 8 6. 2"6)7 ,77: -177 8 0, 8 7.0%. K -,77 8 0, 8 7.,7. K -,77 8 6. 2",77 077: -177 8 01 8 7.,7. K -077 8 6. 0"027 277: -277 8 6. 0")77 stockout per unit 8 4 orders per #ear. xxiii . Ans!er: A 9rdering costs 2 8 <,77 477 Carr#ing costs -%7"777 O , 8 7.7% 14"7%7 Total 16"%%7 xxiv . Ans!er: C 1avings in :8penses=additional +nvestment in +nventor# J /a8imum +nterest *ate 77"777 = -1"477"777 L 1"777"777. J 4.7%; xxv . Ans!er: C Eumber of units to be purcased in advance: 67"777 L 7"%77 4,"%77 Average investments in !orking capital: 4,"%77 8 7.%Q 8 <,% 1"701",%7 9pportunit# cost 1"701",%7 8 7.1, 1,0"7%7 QTe average investment is one(alf -4,"%77 K 7. O , xxvi . Ans!er: C k J -, 64. 8 -0)7 ,7 J 0).7; Te solution assumes tat te compan# foregoes te discount onl# once during te #ear. xxvii . Ans!er: B Wit credit terms of ,=17" n=)7 one must pa# on te 17t da# coosing to finance te net pa#ment -invoice price minus te cas discount. at te rate of , percent for %7 da#s" pa#ing te loan on te )7t da#. Te annuali$ed rate of foregoing te discount is 12.6 percent. k J ,=64 8 0)%=%7 J 12.6; xxviii . Ans!er: B k J 17 O -177 L 17. J 11.11; xxix . Ans!er: C <rincipal ,77"777 ?ess: Discount ,77"777 8 7.1% 8 67=0)7 - 7"%77. Compensating balance - ,7"777. Eet proceeds 17,"%77 :ffective rate: -7"%77=17,"%77. 8 0)7=67 17.2; xxx . Ans!er: B +nterest e8pense 1/ 8 7.1, 1,7"777 ?ess interest income on additional CA balance -,77"777 8 7.70. )"777 Eet interest cost 112"777 :ffective interest rate 112"777=-1"777"777 L ,77"777. 12.,%; xxxi . Ans!er: A +nterest for 1 #ear 1/ 8 1,; 1,7"777 Average <rincipal: R1/ K -1/=1,.S O , %21"))7 :stimated effective rate 1,7"777=%21"))7 ,,.1%; Alternative solution for appro8imate effective rate: -, 8 Eo. of pa#ments 8 +nterest. O R-1 K Eo. of pa#ments. 8 <rincipalS -, 8 1, 8 <1,7"777. O -10 8 <1/. J ,,.1%; xxxii . Ans!er: C Discount %/ 8 7.7, 177"777 +nterest -%/ 8 7.64 8 7.1,. 8 1%=0)7 J ,2"%77 1avings J 7%"%77 xxxiii . Ans!er: A <urcase discount 17"777 8 7.7, 8 ,77 purcases 2"477 +nterest on borro!ed mone# 6"477 8 7.1, 1"17) 1avings 0"),2 Eumber of purcases: 0)7 da#s=1%(da# interval ,77 xxxiv . Ans!er: B Te cost of discounts missed is 1,.0; !ic is more tan te 4 percent tat te bank carges. Te compan# sould borro! on te 17t" pa# te invoice" and finance at 4; for te ne8t 07 da#s -pa# off te bank on te 27t.. Cost of foregoing discount: -1 66. 8 -0)7 07. J 1,.01; xxxv . Ans!erC B Eet proceeds in pesos <1"%77"777 Divided b# net proceeds percentage 1.77 L 7.1 L 7.1% 7.7% <rincipal amount <,"777"777