Financial Management - Chapter 20 Credit and Inventory Management (Continue)

55.

A just-in-time inventory system: I. when implemented properly reduces the cost of inventory to zero. II. increases the inventory turnover rate. III. is sufficient to handle immediate production needs. IV. minimizes the costs of holding inventory.    A.  I and III only B.  II and IV only C.  I, II, and IV only D.  II, III, and IV only E.  I, II, III, and IV Refer to section 20.8

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-03 The types of inventory and inventory management systems used by firms. Section: 20.8 Topic: Just-In-Time inventory

56.	The incremental investment in receivables under the accounts receivable approach is equal to:    A.  P - vQ′. B.  PQ′. C.  PQ + v(Q′ - Q). D.  P(Q′ - Q). E.  PQ(Q′ - Q). Refer to section 20.A

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: Accounts receivable approach

57.

The accounts receivable approach to credit policy supports the theory that:    A.  a firm's risk of offering credit to a new customer is limited to the variable cost of the sold items. B.  the best credit policy is an all-cash policy. C.  the cost of offering credit to a new customer is the same as the cost of offering credit to an existing customer. D.  foregoing cash discounts is a method of obtaining inexpensive short-term financing. E.  the default risk of a credit policy is the same as the default risk under an all cash-policy if your customers remain the same. Refer to section 20.A

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: Accounts receivable approach

58.

Which two of the following are the key elements in determining whether or not a switch from a no-credit policy to a credit policy is advisable? I. variable cost per unit II. cash discount percentage III. credit price IV. default rate    A.  I and III only B.  II and IV only C.  II and III only D.  I and IV only E.  III and IV only Refer to section 20.A

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: NPV of switch

59.

On average, your firm sells $38,700 of items on credit each day. The firm's average operating cycle is 49 days and it acquires and sells inventory, on average, every 17 days. What is the average accounts receivable balance?    A.  $657,900 B.  $848,000 C.  $1,238,400 D.  $1,315,500 E.  $1,896,300 Accounts receivable balance = $38,700 × (49 - 17) = $1,238,400

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.1 Topic: Accounts receivable balance

60.	The Winter Store just purchased $48,300 of goods from its supplier with credit terms of 2/10, net 25. What is the discounted price?    A.  $43,470 B.  $46,209 C.  $47,334 D.  $47,929 E.  $48,300 Discounted price = $48,300 × (1 - 0.02) = $47,334

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.2 Topic: Accounts receivable discount

61.

Today, October 12, Nadine's Fashions purchased $511 worth of merchandise from a supplier. The credit terms are 1/5, net 20. By what day does Nadine's have to make the payment to receive the discount? Note: October has 31 days.    A.  October 13 B.  October 15 C.  October 17 D.  October 27 E.  November 1 End of discount period = October 12 + 5 days = October 17

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.2 Topic: Accounts receivable discount

62.

A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual rate of the discount if the firm purchases $4,800 worth of merchandise?    A.  27.24 percent B.  26.57 percent C.  28.80 percent D.  29.03 percent E.  29.27 percent Days in period = 40 - 10 = 30; Periods per year = 365/30 = 12.166667 Interest rate for 30 days = [0.02 × $4,800]/[(1 - 0.02) × $4,800] = 0.0195578 Effective annual rate = (1 + .01955780195578)12.166667 - 1 = 26.57 percent

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.2 Topic: Accounts receivable discount

63.

Cape May Products currently sells 650 units a month at a price of $59 a unit. The firm believes it can increase its sales by an additional 125 units if it switches to a net 30 credit policy. The monthly interest rate is 0.35 percent and the variable cost per unit is $38. What is the incremental cash inflow from the proposed credit policy switch?    A.  $774 B.  $2,625 C.  $4,750 D.  $5,690 E.  $7,375 Incremental cash flow = ($59 - $38) (125) = $2,625

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.3 Topic: Credit policy switch

64.

Polly's Home Accents currently sells 320 units a month at a price of $59 a unit. Polly thinks she can increase her sales by an additional 55 units if she switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is $32. What is the net present value of the proposed credit policy switch?    A.  $350,610 B.  $350,895 C.  $426,507 D.  $621,929 E.  $821,135 NPV of switch = - [($59 × 320) + ($32 × 55)] + [($59 - $32) × 55]/0.004 = $350,610

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.3 Topic: Credit policy switch

65.

Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit. The firm believes it can increase its sales by an additional 40 units if it switches to a net 30 credit policy. The monthly interest rate is 0.5 percent and the variable cost per unit is $480. What is the net present value of the proposed credit policy switch?    A.  -$213,360 B.  -$9,240 C.  $190,200 D.  $1,287,520 E.  $1,768,680 NPV = - [($729 × 280) + ($480 × 40)] + [($729 - $480) × 40]/0.005 = $1,768,680

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.3 Topic: Credit policy switch

66.

Currently, The Toy Box sells 465 units a month at an average price of $42 a unit. The company thinks it can increase sales by an additional 130 units a month if it switches to a net 30 credit policy. The monthly interest rate is 0.4 percent and the variable cost per unit is $21. What is the incremental cash inflow of the proposed credit policy switch?    A.  $2,120 B.  $2,730 C.  $2,760 D.  $2,810 E.  $5,070 Incremental cash flow = ($42 - $21) (130) = $2,730

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.3 Topic: Credit policy switch

67.

Preston Milled Products currently sells a product with a variable cost per unit of $21 and a unit selling price of $40. At the present time, the firm only sells on a cash basis with monthly sales of 2,800 units. The monthly interest rate is 0.5 percent. What is the switch break-even point if the firm switched to a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant.    A.  2,830 units B.  2,910 units C.  3,333 units D.  3,414 units E.  3,526 units Break-even point = Q′ - 2,800 = ($40 × 2,800)/{[($40 - $21)/0.005] - $21} = 30 units Q′ = 2,800 + 30 = 2,830 units

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-03 The types of inventory and inventory management systems used by firms. Section: 20.3 Topic: Switch break-even point

68.

Saucier & Co. currently sells 2,100 units a month for total monthly sales of $86,500. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $18 and the monthly interest rate is 1.2 percent. What is the switch break-even level of sales? Assume the selling price per unit and the variable costs per unit remain constant.    A.  1,943 units B.  2,117 units C.  2,145 units D.  2,406 units E.  2,548 units Break-even point = Q′ - 2,100 = ($86,500)/{[(($86,500/2,100) - $18)/0.012] - $18} = 45 units; Q′ = 2,100 + 45 = 2,145 units

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.3 Topic: Switch break-even point

69.

The Cellar Door currently sells 9,620 units a month for total monthly sales of $316,000. The company is considering replacing its current cash only credit policy with a net 30 policy. The variable cost per unit is $15 and the monthly interest rate is 1.5 percent. What is the switch break-even level of sales?    A.  9,711 units B.  9,779 units C.  9,814 units D.  9,957 units E.  9,889 units Break-even point = Q′ - 9,620 = ($316,000)/{[(($316,000/9,620) - $15)/0.015] - $15} = 269 units; Q′ = 9,620 + 269 = 9,889 units

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.3 Topic: Switch break-even point

70.

You have the opportunity to make a one-time sale if you will give a new customer 30 days to pay. You suspect there is a 10 percent chance this person will never pay you. The sales price of the item the customer wants to buy is $289. Your variable cost on that item is $156 and your monthly interest rate is 1.75 percent. Should you grant credit to this customer? Why or why not?    A.  yes; because the NPV of the potential sale is $113.05 B.  yes; because the NPV of the potential sale is $99.63 C.  no; because the NPV of the potential sale is -$133.00 D.  no; because the NPV of the potential sale is -113.05 E.  no; because the NPV of the potential sale is -$89.65 NPV = -$156 + {[1 - 0.10] × [$289/(1 + 0.0175)]} = $99.63

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.5 Topic: One-time sale

71.

You are considering renting a kiosk in the local mall for a period of three months. Any sale you make will be a one-time sale. There is only a 79 percent chance you will collect payment on a credit sale. The product you want to sell has a variable cost of $3.88 and a sales price of $4.99. The monthly interest rate is 1.5 percent. Should you offer people 30 days to pay? Why or why not?    A.  yes; because the NPV of a credit sale is $0.09. B.  yes; because the NPV of a credit sale is $0.03. C.  no; because the NPV of a credit sale is -$0.08. D.  no; because the NPV of a credit sale is -$0.02. E.  It doesn't matter because the NPV of a credit sale is approximately zero. NPV = -$3.88 + {0.79 × [$4.99/(1 + 0.015)]} = $0

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.5 Topic: One-time sale

72.

You are trying to attract new customers that you feel could become repeat customers. The average selling price of your products is $69 each with a $41 per unit variable cost. The monthly interest rate is 1.5 percent. Your experience tells you that 8 percent of these customers will never pay their bill. What is the value of a new customer who does not default on his or her bill?    A.  $1,733 B.  $1,867 C.  $2,617 D.  $4,817 E.  $8,867 PV = ($69 - $41)/0.015 = $1,867

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.5 Topic: Repeat sale

73.

You are trying to attract new customers that you feel could become repeat customers. The average price of your product is $619 per unit with a $435 variable cost per unit. The monthly interest rate is 1.8 percent. Your experience tells you that 9 percent of these customers will never pay their bill. Should you offer credit terms of net 30 to attract these potential customers? Why or why not?    A.  yes; because the NPV of extending credit is $8,867 B.  yes; because the NPV of extending credit is $9,787 C.  yes; because the NPV of extending credit is $128 D.  no; because the NPV of extending credit is -$459 E.  It doesn't matter because the NPV of extending credit is zero. NPV = -$435 + {[1 - 0.09] × [($619 - $435)/0.018]} = $8,867

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.5 Topic: Repeat sale

74.	A firm sells 4,500 units of an item each year. The carrying cost per unit is $2.15 and the fixed costs per order are $69. What is the economic order quantity?    A.  374 units B.  421 units C.  497 units D.  537 units E.  623 units EOQ = [(2 × 4,500 × $69)/$2.15]1/2 = 537 units

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-04 How to determine the costs of carrying inventory and the optimal inventory level. Section: 20.8 Topic: Economic order quantity

75.

The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair. The store consistently sells 5,700 pairs of these roller skates every year. The fixed costs to order more skates is $68 and the carrying costs are $1.95 per pair. What is the economic order quantity?    A.  446 pairs B.  515 pairs C.  529 pairs D.  631 pairs E.  648 pairs EOQ = [(2 × 5,700 × $68)/$1.95]1/2 = 631 pairs

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-04 How to determine the costs of carrying inventory and the optimal inventory level. Section: 20.8 Topic: Economic order quantity

76.

One of the best selling items L.T. Ten offers sells for $9.99 a unit. The variable cost per unit is $6.38 and the carrying cost per unit is $1.12. The firm sells 6,500 of these units each year. The fixed cost to order this item is $75. What is the economic order quantity?    A.  690 units B.  747 units C.  933 units D.  1,157 units E.  1,260 units EOQ = [(2 × 6,500 × $75)/$1.12]1/2 = 933 units

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-04 How to determine the costs of carrying inventory and the optimal inventory level. Section: 20.8 Topic: Economic order quantity

77.

Each year you sell 950 units of a product at a price of $899 each. The variable cost per unit is $575 and the carrying cost per unit is $16.90. You have been buying 100 units at a time. Your fixed cost of ordering is $60. What is the economic order quantity?    A.  82 units B.  95 units C.  105 units D.  113 units E.  124 units EOQ = [(2 × 950 × $60)/$16.90]1/2 = 82 units

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 20-04 How to determine the costs of carrying inventory and the optimal inventory level. Section: 20.8 Topic: Economic order quantity

78.

Weisbrough United currently has a cash sales only policy. Under this policy, the firm sells 410 units a month at a price of $219 a unit. The variable cost per unit is $140 and the carrying cost per unit is $3.30. The monthly interest rate is 1.3 percent. The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy. What is the net present value of the switch using the one-shot approach?    A.  $255,590 B.  $296,110 C.  $298,470 D.  $302,233 E.  $305,902 Monthly benefit = [($219 × 475)/1.013] - [$140 × 475] - [($219 - $140) × 410] = $3,800.03; NPV of switch = $3,800.03 + ($3,800.03/0.013) = $296,110

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: One-shot approach

79.

Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a month at a price of $469 each. The variable cost per unit is $305 and the monthly interest rate is 1.7 percent. Based on a recent survey, the firm believes it can sell an additional 36 units per month if it offers a net 30 credit policy. What is the net present value of the switch using the one-shot approach?    A.  $212,806 B.  $231,543 C.  $235,479 D.  $248,946 E.  $251,118 Monthly benefit = {[$469 × (215 + 36)]/(1 + 0.017)} - {$305 × (215 + 36)} - {($469 - $305) × 215} = $3,936.23; NPV of switch = $3,936.23 + ($3,936.23/0.017) = $235,479

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: One-shot approach

80.

Under your current cash sales only policy you sell 132 units a month for a total sales value of $9,900. Your variable cost per unit is $44 and your monthly interest rate is 1 percent. Based on a recent survey, you believe that you can sell an additional 25 units per month if you offer a net 30 credit policy. What is the net present value of the proposed switch using the accounts receivable approach?    A.  $65,976 B.  $66,500 C.  $69,081 D.  $70,224 E.  $73,566 P = $9,900/132 = $75

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: Accounts receivable approach

81.

You are currently selling 72 units a month at a price of $210 a unit. Your variable cost of each unit is $130. If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase to a total of 95 units per month. The monthly interest rate is 1.5 percent. What is the net present value of this proposed switch using the accounts receivable approach?    A.  $104,557 B.  $114,829 C.  $134,822 D.  $136,516 E.  $141,520

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: Accounts receivable approach

82.

Your current sales consist of 32 units per month at a price of $225 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $240 a unit. If you make the switch you do not expect your total monthly sales quantity to change but you do expect a 3 percent default rate. The monthly interest rate is 1.5 percent. What is the net present value of the proposed credit policy switch?    A.  $6,727 B.  $6,893 C.  $7,965 D.  $9,440 E.  $9,481 d = ($240 - $225)/$240 = 0.0625 NPV = - ($225 × 32) + {($240 × 32) × [(0.0625 - 0.03)/0.015]} = $9,440

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: Discounts and default risk

83.

Your current sales consist of 45 units per month at a price of $390 a unit. You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy. If you decide to switch your credit policy you also plan to increase the sales price to $410 a unit. The monthly interest rate is 1.4 percent. What is the break-even default rate of the proposed switch?    A.  3.55 percent B.  3.68 percent C.  4.29 percent D.  4.71 percent E.  4.88 percent d = ($410 - $390)/$410 = 0.048780488 π = 0.048780488 - 0.014 (1 - 0.048780488) = 3.55 percent

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.A Topic: Discounts and default risk

84.

The Green Hornet sells earnings forecasts for international securities. Its credit terms are 2/10, net 30. Based on experience, 55 percent of all customers will take the discount. The firm sells 2,700 forecasts every month at a price of $1,100 each. What is the firm's average balance sheet amount in accounts receivable?    A.  $940,274 B.  $1,408,272 C.  $1,855,233 D.  $1,867,012 E.  $1,915,387 Average collection period = 0.55(10 days) + 0.45 (30 days) = 19 days Average A/R = 2,700 ($1,100) (12/365) (19) = $1,855,233

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-3 Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.2 Topic: Accounts receivable

85.	A firm offers terms of 2/9, net 41. What effective annual interest rate does the firm earn when a customer does not take the discount?    A.  18.67 percent B.  20.45 percent C.  23.37 percent D.  25.34 percent E.  25.92 percent EAR = [1 + (0.02/0.98)]365/(41 - 9) - 1 = 25.92 percent

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-5 Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.2 Topic: Terms of sale

86.	Music City, Inc. has an average collection period of 62 days. Its average daily investment in receivables is $50,000. What are the annual credit sales?    A.  $268,407 B.  $277,109 C.  $294,355 D.  $325,893 E.  $767,123 Annual credit sales = $50,000 (365/62) = $294,355

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-6 Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.1 Topic: Receivables turnover

87.

The Turn It Up Corporation sells on credit terms of net 30. Its accounts are, on average, 6 days past due. Annual credit sales are $7 million. What is the company's balance sheet amount in accounts receivable?    A.  $690,411 B.  $723,333 C.  $851,667 D.  $915,407 E.  $923,593 A/R = $7,000,000 [(30 + 6)/365] = $690,411

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-8 Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.1 Topic: Accounts receivable

88.

Keep M Flying is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.7 million per unit, and the credit price is $2.1 million each. Credit is extended for one period. Based on historical experience, payment for about 1 out of every 240 such orders is never collected. The required return is 3.2 percent per period. What is the NPV per unit if this is a one-time order?    A.  $316,407 B.  $321,819 C.  $326,405 D.  $334,290 E.  $351,056 NPV = -$1,700,000 + [1 - (1/240)] [$2,100,000]/(1 + 0.032) = $326,405

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-9 Learning Objective: 20-01 How firms manage their receivables and the basic components of a firm's credit policies. Section: 20.3 Topic: Credit policy

89.

Quest, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be one month. The required return is 1.6 percent per month. Based on the following information, what is the NPV of the new policy?        A.  $28,750 B.  $32,500 C.  $35,000 D.  $38,250 E.  $40,000 Benefit of switching = ($800 - $425) (1,150 - 1,110) = $15,000 Cost of switching = $800 (1,110) + $425 (1,150 - 1,110) = $905,000 New policy NPV = $15,000/0.016 - $905,000 = $32,500

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-10 Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.3 Topic: Credit policy evaluation

90.

Cohen Industrial Products uses 2,100 switch assemblies per week and then reorders another 2,100. The relevant carrying cost per switch assembly is $18, and the fixed order cost is $300. What is the EOQ?    A.  1,279.84 B.  1,809.97 C.  1,907.88 D.  2,278.42 E.  2,698.15 EOQ = [(2 × 52 × 2,100 × 300)/$18]½ = 1,907.88

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-11 Learning Objective: 20-04 How to determine the costs of carrying inventory and the optimal inventory level. Section: 20.8 Topic: EOQ

91.

Roger's Store begins each week with 150 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $48 per year and the fixed order cost is $70. What is the optimal number of orders that should be placed each year?    A.  48.69 B.  51.71 C.  54.20 D.  61.10 E.  64.50 EOQ = [(2 × 52 × 150 × $70)/$48]1/2 = 150.83 Number of orders per year = 52(150)/150.83 = 51.71

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 20-12 Learning Objective: 20-04 How to determine the costs of carrying inventory and the optimal inventory level. Section: 20.8 Topic: Optimal order quantity

92.

The Dilana Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2 percent per period. What is the NPV of the new policy given the following information?        A.  -$230,880 B.  -$118,420 C.  $311,508 D.  $328,997 E.  $388,340 Cash flow from old policy = ($71 - $36) (3,500) = $122,500 Cash flow from new policy = ($74 - $36) (3,560) = $135,280 Incremental cash flow = $135,280 - $122,500 = $12,780 NPV of new policy = - [$71(3,500) + $36(3,560 - 3,500)] + $12,780/0.02 = $388,340

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium EOC: 20-14 Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.5 Topic: Credit policy

93.

The Cycle Shoppe has decided to offer credit to its customers during the spring selling season. Sales are expected to be 330 bicycles. The average cost to the shop of a bicycle is $300. The owner knows that only 93 percent of the customers will be able to make their payments. To identify the remaining 7 percent, she is considering subscribing to a credit agency. The initial charge for this service is $540, with an additional charge of $6 per individual report. What is the amount of the net savings from subscribing to the credit agency?    A.  $3,790 B.  $3,920 C.  $4,080 D.  $4,410 E.  $4,950 Net savings = (330 × $300 × 0.07) - $540 - (330 × $6) = $4,410

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium EOC: 20-16 Learning Objective: 20-02 How to analyze the decision by a firm to grant credit. Section: 20.5 Topic: Credit policy