Chapter 20

Problems 1-20, Appendix 1-5

Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel. To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak" and "Solver Add-In."

sis ToolPak"

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Question 1 Input Area:

Units Unit price Terms Net

400 125 1% / 30

10

Output Area:

a. Days until account is overdue Remittance b. Discount Discount period Remittance c. Implicit interest Days of credit

30 50,000 1% 10 49,500 500 20

$ $

Chapter 20
Question 2 Input Area:

Annual sales Collection period # days per year

47,000,000 36 365

Output Area:

Receivable turnover Average receivables $

10.139 4,635,616

Chapter 20
Question 3 Input Area:

Terms Net Percentage taking discount Units sold per period Sales price Periods per year

2 / 30 65% 1,300 1,700 12

10

Output Area:

a. ACP b. Total annual sales Receivables turnover Average receivables balance $

17.00 26,520,000 21.4706

$ 1,235,178.08

Chapter 20
Question 4 Input Area:

Credit sales Collection period Cost of production (% of sales)

19,400 34 75%

Output Area:

Daily sales Average A/R

$ $

2,771.43 94,228.57

Chapter 20
Question 5 Input Area:

Terms Net a. New discount b. New credit period c. New discount period

1% / 35 2% 60 15

10

Output Area:

EAR (original terms) a. EAR b. EAR c. EAR

15.80% 34.31% 7.61% 20.13%

Chapter 20
Question 6 Input Area:

Collection period Daily investment in receivables # days per year

39 47,500 365

Output Area:

Receivables turnover Annual credit sales

9.3590 444,551.28

Chapter 20
Question 7 Input Area:

Units sold Unit price Terms Net Discount used % New terms New net

5,600 425 1% / 40 60% 2% / 30

10

10

Output Area:

Total credit sales ACP Receivables turnover Average receivables

2,380,000 22.00 16.591 143,452.05

If the firm increases the cash discount, then more people will pay sooner, thus lowering the average collection period. If the ACP declines, receivables turnover increases, which will lead to a decrease in average receivables.

Chapter 20
Question 8 Input Area:

Net Average days past due Annual credits

30 8 8,400,000

Output Area:

ACP Receivables turnover Receivables

38.00 9.6053 874,520.55

Chapter 20
Question 9 Input Area:

Quantity ordered Variable costs $ Credit price $ Uncollected orders Required return

8 1,600,000 1,870,000 0.00500 2.9%

Output Area:

a. NPV (per unit) Fill the order b. p c. NPV (per unit) Fill the order p

208,211.86

11.96% $ 7,663,793.10 82.81%

It is assumed that if a person has paid his or her bills in the past, then they will pay their bills in the future. This implies that if someone doesn't default when credit is first granted, then they will be a good customer far into the future, and the possible gains from the future business outweigh the possible losses from granting credit the first time.

Chapter 20
Question 10 Input Area:

Required return

1.5% Current Policy $ 720 $ 495 1,305 New Policy $ $

Price per unit Cost per unit Unit sales per month

720 495 1,380

Output Area:

Cost of switching Perpetual benefit of switching NPV

$ $ $

976,725.00 16,875.00 148,275.00

The firm will have to bear the cost of sales for one month before they receive any revenue from credit sales, which is why the initial cost is for one month. Receivables will grow over the one month credit period, and then will remain about stable with payments and new sales offsetting one another.

Chapter 20
Question 11 Input Area:

Number of items used Frequency of order Carrying cost per unit Fixed order cost

$ $

2,500 52 9.00 1,700.00

Output:

Carrying cost Order cost EOQ The firm's ordering policy is The company should the order size and the number of orders.

$ $

11,250.00 88,400.00 7,007.93

not optimal increase decrease

Chapter 20
Question 12 Input Area:

Number of items used Frequency of order Carrying cost per unit Fixed order cost

$ $

300 52 41.00 95.00

Output:

Carrying cost Order cost EOQ Number of orders per year The firm's ordering policy is The company should the order size and the number of orders.

$ $

6,150.00 4,940.00 268.87 58.02

not optimal decrease increase

Chapter 20
Question 13 Output Area:

Carrying costs = (Q/2)*CC Restocking costs = F*(T/Q) Q2 = 2*F*(T/CC) Q = [2F*(T/CC)]1/2 = EOQ

Chapter 20
Question 14 Input Area:

Required return

2.5% Current Policy $ 91 $ 47 3,850 New Policy $ $ 94 47 3,940

Price per unit Cost per unit Unit sales per month

Output Area:

Cash flow from old policy: Cash flow from new policy: Incremental cash flow NPV

$ $ $ $

169,400 185,180 15,780 276,620.00

Chapter 20
Question 15 Input Area:

Net Required return

30 0.95% Current Policy 290 230 1,105 New Policy 295 234 1,125

Price per unit Cost per unit Unit sales per month

$ $

$ $

Output Area:

Cash flow from old policy: Cash flow from new policy: Incremental cash flow NPV

$ $ $ $

66,300 68,625 2,325 (84,813.16)

Chapter 20
Question 16 Input Area:

Sales Cost per unit Probablity of default Initial charge to subscribe Cost of each credit report

$ $ $

500 490 4% 450 5.00

Output Area:

Cost of subscription Savings from credit reports Net savings

$ $ $

2,950.00 9,800.00 6,850.00

The shop should subscribe to the credit agency.

Chapter 20
Question 17 Input Area:

Required return

2.5% Current Policy $ 91 $ 47 3,850 New Policy $ $ 94 47 3,940

Price per unit Cost per unit Unit sales per month

Output Area:

Breakeven quantity

3,789.09

Chapter 20
Question 18 Input Area:

Required return

2.5% Current Policy $ 91 $ 47 3,850 New Policy $ $ 94 47 4,100

Price per unit Cost per unit Unit sales per month

Output Area:

Breakeven price

90.53

Chapter 20
Question 19 Input Area:

Net Required return

30 0.95% Current Policy $ 290 $ 230 1,105 New Policy $ $

Price per unit Cost per unit Unit sales per month

295 234 1,125

Output Area:

Breakeven price

295.72

Chapter 20
Question 20 Input Area:

# sold per week EOQ Safety stock

700 500 100

Output Area:

Suits sold per year Orders per year

36,400 72.80

Chapter 20 - Appendix
Question 1 Input Area:

Net Unit sales per period New unit sales per period Current price per unit New price per unit Uncollectible sales Required return per period

$ $

1 40,000 40,000 510 537 3.00% 2.50%

Output Area:

Cash flow from old policy: Cash flow from new policy: Incremental cash flow NPV

$ $ $ $

20,400,000 20,835,600 435,600 (2,976,000.00)

Chapter 20- Appendix

Question 2 Input Area:

Quantity sold Cash price Days' credit Credit price Discount period Required return d. Default rate

$ $

3,300 90.00 30 91.84 15 1% 11%

Output Area:

a. Terms

2/

15 $

net 297,000

30

b. Maximum accounts receivable

c. Since the quantity sold does not change, variable cost is the same under either plan. d. No, because d - p = -9% , the NPV will be negative. NPV $ (3,023,592) The breakeven credit price is $ 102.13 , which implies the breakeven discount is 11.88% The NPV at this discount rate is $0.00

Chapter 20- Appendix

Question 3 Input Area:

Current price Variable cost Units ordered Payment period a. Default probability Required return c. Cash price

$ $

1,140 760 15 30 20% 2% 1,090

Output Area:

a. NPV $ The order should be taken. b. Breakeven probability

2,011.76

32.00%

c. Effectively, the cash discount is 4.39% Since the discount rate is less than the default rate, credit should not be granted.

Chapter 20 - Appendix
Question 4 Input Area:

Net Required return per month

90 0.75% Refuse Credit 71 32 6,200 1.0 1.50 Grant Credit 75 33 6,900 0.9

Price per unit Cost per unit Quantity sold per quarter Probability of payment c. Cost of credit report

$ $

$ $

Output Area:

a. Cash discount 5.33% Default probability 10.00% Since the default probability is greater than the cash discount, credit should not be granted. b. Due to the increase in both quantity sold and credit price when credit is granted, an additional incremental cost is incurred. Additional incremental cost $ 29,300 Breakeven credit price $ 77.32 c. NPV $ (74,622.27) The reports should not be purchased and credit should not be granted.

Chapter 20- Appendix

Question 5 Output Area:

Old Cashflow New Cashflow Incremental Cashflow Thus, NPV

= (P v)Q = (P v)(1 a)Q + aQ [(1 p)P v] = (P v)Q + (P v)(1 a)Q + aQ [(1 p)P v] = (P v)(Q Q) + aQ [(1 p)P P] = (P v)(Q Q) aPQ + (P - v)( Q - Q) aQ{(1- p )P - P}

1- p )P - P}