Ron Muller 2007-08 1 MODULE 10: THE FINANCIAL PLANNING PROCESS QUESTION 1Alma System is a distributor of iceboxes. All sales are on a credit basis, net 30 days, and are evenly distributed over its ten sales regions throughout Canada. The company has recently undertaken an analysis aimed at improving its cash management procedures. Alma determined that it takes an average of 4.2 days for customers’ payments to reach head office in Vancouver from the time they are mailed. It takes two full days in processing time prior to depositing the cheques with a local bank. The company receives 500 cheques weekly from customers from each region. Annual sales average $50 million for each regional office. Reasonable investment opportunities can be found to yield 4 percent annually. To alleviate the float problem, the firm is considering the use of a lockbox system in each of the ten regions. This would reduce the mail float by 2.0 days. One day in processing float would also be eliminated. The lockbox system would cost each region $300 per month plus $.40 per payment received. Required: a)Determine the net cost or savings from the use of a lockbox system. b)What if the interest rate changed. At what rate would Alma be indifferent to using or not using the lockbox system?
Ron Muller 2007-08 2 QUESTION 1 SOLUTION )
Ron Muller 2007-08 3 QUESTION 2ABC sells stress release vitamins (to CGA students and instructors!) All sales are made on credit. There is a stable market for this vitamin and seldom are there any fluctuations in sales. The following information from ABC’s 2007 financial statements is shown below. The balance sheet accounts are reported at averages. Current assets 780,0001Current liabilities 558,000 Capital assets 750,000Current portion of long term debt 30,000 Total assets 1,530,000 Long term debt 462,000 Equity 480,000Total 1,530,000 1Cash 60,000 A/R 300,000 Inventory 420,000780,000 2 A/P and accrued liabilities 288,000 Notes payable270,000558,000 Sales 6,150,000 COGS 3,690,000 Required: (a) What strategy is the firm following in financing its net working capital? (b) ABC is considering tightening its credit terms. This will decrease the receivables conversion period to 10 days. If it implements the change how much can the firm decrease its net working capital? (c) If sales are expected to increase to 7,620,000 next year and the firm does not change its credit policy, estimatenext year’s net working capital if cash is expected to average 75,000 and COGS is 4,572,000. Assume that notes payable and the current portion of long term debt remain constant and COGS and accounts receivable remain a fixed proportion of credit sales. Assume also that inventory and accounts payable remain a fixed proportion of COGS. 2
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