FIN2101 BUSINESS FINANCE II 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 quant ity 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 d iscount offered? 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 ecial 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 5240000 What is the opportunity cost of holding cash? What is the total cost of making withdrawals of the economic conversion quantity calculated?August 2003 FIN2101 BUSINESS FINANCE II 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? 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 $240 000 What is the opportunity cost of holding cash? What is the total cost of making withdrawals of the economic conversion quantity calculated?