Question 1: (Cash conversion cycle) Dennis Lasser has collected some information about a food wholesaler in order to estimate its cash conversion cycle. The accumulated information is given. What will Dennis find the cash conversion cycle to be?
Inventory turnover = 10 x Inventory conversion period = 365/10 = 36.5 days
Receivables turnover = 20 x Receivables collection period = 365/20 = 18.25 days
Payables turnover = 25 x Payables deferral period = 365/25 = 14.6 days
Question 2: (Cost of bank loan) A bank loan agreement calls for an interest rate equal to prime rate plus 1%. If prime rate averages 9% and non-interest-earning compensating balances equal to 10% of the loan must be maintained, what are the APR and the APY of the loan assuming annual payments?
Question 3: (NPV of granting credit) A credit sale of $15,000 has a 95% probability of being repaid in two months and a 5% probability of a complete default. If the investment in the sale is $12,000 and the opportunity cost of funds is 15% per year, what is the NPV of granting credit?
Question 4: (Economic order quantity) Knoxville Accountants LLP consumes 100,000 packets of plain copier paper annually. The usage is roughly constant throughout the year. The carrying cost of this inventory is $2.00 per unit average inventory per year. The ordering and delivery cost is a fixed $100 per order.
1. What is the economic order quantity?
2. How many orders will be placed per year using the EOQ?
3. What is the average inventory level?
4. What is the total annual inventory cost?