Topic: Corporate Finance

P15–1 Cash conversion cycle American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Goods sold total $20 million, and purchases are $15 million.

  1. Calculate the firm’s operating cycle.
  2. Calculate the firm’s cash conversion cycle.
  3. Calculate the amount of resources needed to support the firm’s cash conversion cycle.
  4. Discuss how management might be able to reduce the cash conversion cycle.

 

P15–15 Lockbox system Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The cost of the lockbox system is $9,000 per year. (Note: Assume a 365-day year.)

  1. What amount of cash will be made available for other uses under the lockbox system?
  2. What net benefit (cost) will the firm realize if it adopts the lockbox system? Should it adopt the proposed lockbox system?

P16–2 Cost of giving up early payment discounts  Determine the cost of giving up the discount under each of the following terms of sale. (Note: Assume a 365-day year.)

  1. 2/10 net 30.
  2. 1/10 net 30.
  3. 1/10 net 45.
  4. 3/10 net 90.
  5. 1/10 net 60.
  • 3/10 net 30.
  1. 4/10 net 180.

 

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