FIN-450 Week 5 Chapter 15 Practice Problems | Documents and Forms | Spreadsheets

FIN-450 Week 5 Chapter 15 Practice Problems

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FIN-450 Week 5 Chapter 15 Practice Problems

Intermediate Finance - Capital Budgeting

Grand Canyon University

 

Complete the following problems from Chapter 15 in the textbook:

1. P15-3

2. P15-9

3. P15-12

4. P15-16

Follow these instructions for completing and submitting your assignment:

1. Do all work in Excel. Do not submit Word files or *.pdf files.

2. Submit a single spreadsheet file for this assignment. Do not submit multiple files.

3. Place each problem on a separate spreadsheet tab.

4. Label all inputs and outputs and highlight your final answer.

5. Follow the directions in "Guidelines for Developing Spreadsheets." You are not required to submit this assignment to Turnitin.

1.  P15-3 Multiple changes in cash conversion cycle Garrett Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 million. Assume that there is no difference in the investment per dollar of sales in inventory, receivables, and payables, and assume a 365-day year.

a. Calculate the firm’s cash conversion cycle, its daily cash operating expenditure, and the amount of resources needed to support its cash conversion cycle.

b. Find the firm’s cash conversion cycle and resource investment requirement if it makes the following changes simultaneously.

(1) Shortens the average age of inventory by 5 days.

(2) Speeds the collection of accounts receivable by an average of 10 days.

(3) Extends the average payment period by 10 days.

c. If the firm pays 13% for its resource investment, by how much, if anything, could it increase its annual profit as a result of the changes in part b?

d. If the annual cost of achieving the profit in part c is $35,000, what action would you recommend to the firm? Why?

2. P15-9 Accounts receivable changes with bad debts A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per unit is $15. As a result of the proposed change, sales are forecast to increase to 60,000 units.

a. What are bad debts in dollars currently and under the proposed change?

b. Calculate the cost of the marginal bad debts to the firm.

c.  Ignoring the additional profit contribution from increased sales, if the proposed change saves $3,500 and causes no change in the average investment in accounts receivable, would you recommend it? Explain.

d. Considering all changes in costs and benefits, would you recommend the proposed change? Explain.

e. Compare and discuss your answers in parts c and d.

3.  P15-12 Shortening the credit period A firm is contemplating shortening its credit period from 40 to 30 days and believes that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses are expected to decrease from 1.5% to 1% of sales. The firm is currently selling 12,000 units but believes that sales will decline to 10,000 units as a result of the proposed change. The sale price per unit is $56, and the variable cost per unit is $45. The firm has a required return on equal-risk investments of 25%. Evaluate this decision, and make a recommendation to the firm. (Note: Assume a 365-day year.)

4. P15-16 Zero-balance account Union Company is considering establishment of a zero-balance account. The firm currently maintains an average balance of $420,000 in its disbursement account. As compensation to the bank for maintaining the zero-balance account, the firm will have to pay a monthly fee of $1,000 and maintain a $300,000 non–interest-earning deposit in the bank. The firm currently has no other deposits in the bank. Evaluate the proposed zero-balance account, and make a recommendation to the firm, assuming that it has a 12% opportunity cost.

A+ Tutorial FIN-450 Week 5 Chapter 15 Practice Problems Intermediate Finance - Capital Budgeting Grand Canyon University Complete the following problems from Chapter 15 in the textbook: 1. P15-3 2. P15-9 3. P15-12 4. P15-16 Follow these i
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