MODULE 4- CURRENTASSET MANAGEMENT (Inventory and cash) · QUESTION1 a firm has a $50 per year carrying cost on each unit of inventory, annual usage of 10 000 units and an ordering cost of $100 per order. Ignoring any potential stockout costs a) Calculate the economic order quantity for the firm b) Calculate the annual inventory policy costs if the firm orders in this quantity
MODULE 4 - CURRENT ASSET MANAGEMENT (Inventory and Cash) • QUESTION 1 • A firm has a $50 per year carrying cost on each unit of inventory, annual usage of 10 000 units, and an ordering cost of $100 per order. Ignoring any potential stockout costs: • a) Calculate the economic order quantity for the firm. • b) Calculate the annual inventory policy costs if the firm orders in this quantity
c) Assuming that the supplier offers a quantity discount of 30 cents per unit off the price of the goods if the firm orders in lots of 400 units. should the firm accept the quantity discount offered
c) Assuming that the supplier offers a quantity discount of 30 cents per unit off the price of the goods if the firm orders in lots of 400 units, should the firm accept the quantity discount offered?
· QUESTION2 a chemical manufacturer uses the same equipment to produce several chemicals. One of these products, BPC5, has particularly stringent purity requirements, so that a special cleansing procedure must be carried out before putting it into production. The cost of this special cleansing is $2 000. Demand for bPcs averages 50 tonnes per week, and the carrying cost is $4 per tonne per week What is the optimal production run?
• QUESTION 2 • A chemical manufacturer uses the same equipment to produce several chemicals. One of these products, BPC5, has particularly stringent purity requirements, so that a special cleansing procedure must be carried out before putting it into production. The cost of this special cleansing is • $2 000. Demand for BPC5 averages 50 tonnes per week, and the carrying cost is $4 per tonne per week. • What is the optimal production run?
QUESTION 3 Given the following information, calculate the economic conversion quantity using the baumol model for cash management Annual interest rate 12 Fixed transaction cost $100 Total cash needed $240000 What is the opportunity cost of holding cash? What is the total cost of making withdrawals of the economic conversion quantity calculated?
• QUESTION 3 • • Given the following information, calculate the economic conversion quantity using the Baumol model for cash management: • • Annual interest rate 12% • Fixed transaction cost $100 • Total cash needed $240 000 • • What is the opportunity cost of holding cash? What is the total cost of making withdrawals of the economic conversion quantity calculated?
QUESTION 4 The management of a large firm, WE Lovett limited has been concerned for some time about the efficiency of its cash management policy, and has engaged your firm for expert financial advice on the matter. a detailed anal ysis of lovett's books shows that its daily net cash flows vary randomly, with a mean of $o and a standard deviation of $25 000
• QUESTION 4 • • The management of a large firm, W.E. Lovett Limited, has been concerned for some time about the efficiency of its cash management policy, and has engaged your firm for expert financial advice on the matter. A detailed analysis of Lovett's books shows that its daily net cash flows vary randomly, with a mean of $0 and a standard deviation of $25 000. •
The company can earn an average of 12%0 on risk-free short -term investments whilst the eld from risk-free long-term investments is 16%. The bank charges Lovett an interest rate of 14%on its overdraft, although there is no charge for the unused portion of its overdraft limit. The fixed cost per transaction for long-term investment or disinvestment is 300: the corresponding cost for short-term transfers is about $20
• The company can earn an average of 12% on risk-free short-term investments, whilst the yield from risk-free long-term investments is 16%. The bank charges Lovett an interest rate of 14% on its overdraft, although there is no charge for the unused portion of its overdraft limit. The fixed cost per transaction for long-term investment or disinvestment is $300; the corresponding cost for short-term transfers is about $20
i Using the Miller-Orr model for cash management, advise W.E. lovett ltd on the return point for the company's bank balance and the upper and lower limits for its bank balance Assume 365 days per year and round money values to the nearest whole dollar i If the yield on long-term investments was 13% and the interest rate on the bank overdraft was 15%, what advice would you give Lovett on the return point and the upper and lower limits? assume all other data remains unchanged and round all money values to the nearest whole dollar
• i) Using the Miller-Orr model for cash management, advise W.E. Lovett Ltd on the return point for the company's bank balance and the upper and lower limits for its bank balance. Assume 365 days per year and round money values to the nearest whole dollar. • ii) If the yield on long-term investments was 13% and the interest rate on the bank overdraft was 15%, what advice would you give Lovett on the return point and the upper and lower limits? Assume all other data remains unchanged and round all money values to the nearest whole dollar
QUESTION 5 Aspen Jeans Limited has collected data about its current operations. The average age of inventory is 55 days; the average collection period is 42 days, and the average payment period is 46 days. The firm has an opportunity cost of short-term financing equal to 9%. Annual investments in the oC amount to $4.8 million. Aspen has been offered a contract to produce private label jeans for a large retailer. If the firm takes the contract, it will increase operating profits by $35 000 and reduce the average age of inventory to 50 days. However, it will increase the length of the collection period to 65 days. No changes will occur the payment period or the amount of oc investments. In all calculations, assume a 365-day year
• QUESTION 5 • Aspen Jeans Limited has collected data about its current operations. The average age of inventory is 55 days; the average collection period is 42 days; and the average payment period is 46 days. The firm has an opportunity cost of short-term financing equal to 9%. Annual investments in the OC amount to $4.8 million. Aspen has been offered a contract to produce private label jeans for a large retailer. If the firm takes the contract, it will increase operating profits by $35 000 and reduce the average age of inventory to 50 days. However, it will increase the length of the collection period to 65 days. No changes will occur in the payment period or the amount of OC investments. In all calculations, assume a 365-day year
a. Calculate Aspen Jeans current OC and CCC effects that the new contract will produce the b. Recalculate the firms cycles for C. Calculate the change in the cost of financing OC investments d. Compare your results in C. above to the promised additional operating profits. Should the firm accept the contract?
• a. Calculate Aspen Jean’s current OC and CCC. • b. Recalculate the firm’s cycles for the effects that the new contract will produce. • c. Calculate the change in the cost of financing OC investments. • d. Compare your results in c. above to the promised additional operating profits. Should the firm accept the contract?
QUESTION 6 On 25 January Coot Company has $250 000 deposited with a local bank. On 27 January the company writes and mails cheques of $20 000 and $60000 to suppliers. At the end of the month Coot's financial manager deposits a $45 000 cheque received from a customer in the morning mail and picks up the end-of-month account summary from the bank. The manager notes that only the $20 000 payment of the 27 January has been cleared by the bank. What are the companys cash account ledger balance and the payment float? What is the company's net float
• QUESTION 6 • • On 25 January Coot Company has $250 000 deposited with a local bank. On 27 January the company writes and mails cheques of $20 000 and $60 000 to suppliers. At the end of the month Coot’s financial manager deposits a $45 000 cheque received from a customer in the morning mail and picks up the end-of-month account summary from the bank. The manager notes that only the $20 000 payment of the 27 January has been cleared by the bank. What are the company’s cash account ledger balance and the payment float? What is the company’s net float?