Calculate the eoq


Problem 1. You have recently been hired as the new bookstore manager for Wilmington University and you are in the process of ordering, guess what? Textbooks!

Cengage Learning (a company that is taking over the textbook business) will send you the texts with these terms: net 30 days.

Looking at old inventory reports, you find that Principles of Managerial Finance on average sits on the shelf for 64 days after it is received until it is sold. Now while students would love to have, say, 30 days to pay for the text, you say, "nothing doing - this is strictly a cash business."
Given the above, what would be your cash conversion cycle (please show work)?

Problem 2. Find the break-even point in units given the following:

Fixed costs: $75,000
Variable costs: $10.50 per unit
Selling price: $14.00
And the Prime is 4%!
Again - show all work, and if there is a formula - I need to see that too!

Problem 3. Joe's Bar (not its real name) uses 800 kegs of adult beverages per year on a continuous basis (assume 365 days of operations per year). The order cost is $50.00 per order and the carrying cost is $2.00 per unit. It takes 5 days to receive a shipment after an order has been placed (old Joe took this TQM course so he now believes in JIT inventory methods - in other words- assume no safety stock).

I need you to calculate four things (and again I need to see your work including a formula if needed)

a. Calculate the EOQ
b. Determine the average level of inventory
c. Determine the reorder point
d. Compute the Total Cost of Inventory

Problem 4. This is a continuation of the previous problem...

One year passes. Joe is now out of the hospital. Seems his delivery company went on strike and Joe ran out of the "adult beverages" just before Hells Angels arrived at his bar. Funny, they did not want to hear about JIT inventory ... bottom line: it was real ugly!
Now Joe has decided "the heck with JIT, I want two weeks safety stock!" What will be the new reorder point (in units)?

Problem 5. Calculate the NPV of a project given the following - and should the company accept or reject the project:

It is estimated that the project will deliver $25,000 operating profit each year for 12 years.

The firm can borrow as much as they like from their bank (which is being bailed out by the Federal Government - bless 'em) at 10%.

They have no retained earnings available - they are paying all their net profit out in dividends at $2.00 per share (I never said this was a well-run company)

They can sell stock at $20.00 with a flotation cost of $4.00 per share. The stock's earnings/dividends are growing at 6%

They are in a 40% marginal tax bracket.

The Board of Directors has determined a target capital structure of 60% debt and 40% common equity. - They have no preferred stock.

The machine they are considering costs $160,000.

And for the last time, be sure to show all work and formulas! You've been warned!

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Finance Basics: Calculate the eoq
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