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Unformatted text preview: 5 – 66,300 Incremental cash flow = $2,325 532 The cost of switching credit policies is: Cost of new policy = –[PQ + Q(v′ – v) + v′ (Q′ – Q)] In this cost equation, we need to account for the increased variable cost for all units produced. This includes the units we already sell, plus the increased variable costs for the incremental units. So, the NPV of switching credit policies is: NPV = –[($290)(1,105) + (1,105)($234 – 230) + ($234)(1,125 – 1,105)] + ($2,325/.0095) NPV = –$84,813.16 16. If the cost of subscribing to the credit agency is less than the savings from collection of the bad debts, the company should subscribe. The cost of the subscription is: Cost of the subscription = $450 + $5(500) Cost of the subscription = $2,950 And the savings from having no bad debts will be: Savings from not selling to bad credit risks = ($490)(500)(0.04) Savings from not selling to bad credit risks = $9,800 So, the company’s net savings will be: Net savings = $9,800 – 2,950 Net savings = $6,850 The company should subscribe to the credit agency. Challenge 17. The cost of switching credit policies is: Cost of new policy = –[PQ + Q(v′ – v) + v′ (Q′ – Q)] And the cash flow from switching, which is a perpetuity, is: Cash flow from new policy = [Q′ (P′ – v) – Q(P – v)] To find the breakeven quantity sold for switching credit policies, we set the NPV equal to zero and solve for Q′ . Doing so, we find: NPV = 0 = –[($91)(3,850) + ($47)(Q′ – 3,850)] + [(Q′ )($94 – 47) – (3,850)($91 – 47)]/.025 0 = –$350,350 – $47Q′ + $180,950 + $1,880Q′ – $6,776,000 $1,833Q′ = $6,945,400 Q′ = 3,789.09 533 18. We can use the equation for the NPV we constructed in Problem 17. Using the sales figure of 4,100 units and solving for P′ , we get: NPV = 0 = [–($91)(3,850) – ($47)(4,100 – 3,850)] + [(P′ – 47)(4,100) – ($91 – 47)(3,850)]/.025 0 = –$350,350 – 11,750 + $164,000P′ – 7,708,000 – 6,776,000 $164,000P′ = $14,846,100 P′ = $90.53 19. From Problem 15, the incremental cash flow from the new credit policy will be: Incremental cash flow = Q′ (P′ – v′ ) – Q(P – v) And the cost of the new policy is: Cost of new policy = –[PQ + Q(v′ – v) + v′ (Q′ – Q)] Setting the NPV equal to zero and solving for P′ , we get: NPV = 0 = –[($290)(1,105) + ($234 – 230)(1,105) + ($234)(1,125 – 1,105)] + [(1,125)(P′ – 234) – (1,105)($290 – 230)]/.0095 0 = –[$320,450 + 4,420 + 4,680] + $118,421.05P′ – 27,710,526.32 – 6,978,947.37 $118,421.05P′ = $35,019,023.68 P′ = $295.72 20. Since the company sells 700 suits per week, and there are 52 weeks per year, the total number of suits sold is: Total suits sold = 700 × 52 = 36,400 And, the EOQ is 500 suits, so the number of orders per year is: Orders per year = 36,400 / 500 = 72.80 To determine the day when the next order is placed, we need to determine when the last order was placed. Since the suits arrived on Monday and there is a 3 day delay from the time the order was placed until the suits arrive, the last order was placed Friday. Since there are five days between the orders, the next order will be placed on Wednesday Alternatively, we could consider that the store sells 100 suits per day (700 per week / 7 days). This implies that the store will be at the safety stock of 100 suits on Saturday when it opens. Since the suits must arrive before the store opens on Saturday, they should be ordered 3 days prior to account for the delivery time, which again means the suits should be ordered in Wednesday. 534 APPENDIX 28A
1. The cash flow from the old policy is the quantity sold times the price, so: Cash flow from old policy = 40,000($510) Cash flow from old policy = $20,400,000 The cash flow from the new policy is the quantity sold times the new price, all times one minus the default rate, so: Cash flow from new policy = 40,000($537)(1 – .03) Cash flow from new policy = $20,835,600 The incremental cash flow is the difference in the two cash flows, so: Incremental cash flow = $20,835,600 – 20,400,000 Incremental cash flow = $435,600 The cash flows from the new policy are a perpetuity. The cost is the old cash flow, so the NPV of the decision to switch is: NPV = –$20,400,000 + $435,600/.025 NPV = –$2,976,000 2. a. The old price as a percentage of the new price is: $90/$91.84 = .98 So the discount is: Discount = 1 – .98 = .02 or 2% The credit terms will be: Credit terms: 2/15, net 30 b. We are unable to determine for certain since no information is given concerning the percentage of customers who will take the discount. However, the maximum receivables would occur if all customers took the credit, so: Receivables = 3,300($90) Receivables = $297,000 (at a maximum) c. Since the quantity sold does not change, variable cost is the same under either plan. 535 d. No, because: d – π = .02 – .11 d – π = –.09 or –9% Therefore the NPV will be negative. The NPV is: NPV = –3,300($90) + (3,300)($91.84)(.0...
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This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of TexasTyler.
 Spring '10
 eshmalwi
 Finance, Corporate Finance

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