 # 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

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.

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.