Problem 7-1 Problem 7-11 Problem 7-16
Spreadsheet Templates by Block, Hirt and Danielsen
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Foundations of Financial Management
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Current Asset Management
Problem 7-1
Objective: Cost-benefit analysis of cash management
Student Name:
Course Name:
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Beth’s Society Clothiers, Inc., has collection centers across the country to speed up collections. The company
also makes its disbursements from remote disbursement centers so the firm’s checks will take longer to clear the
bank. Collection time has been reduced by two and one-half days and disbursement time increased by day one and
one-half days because of these policies. Excess funds are being invested in short-term instruments yielding 6
percent per annum.
a. If the firm has $4 million per day in collections and $3 million per day in disbursements, how many dollars has
the cash management system freed up?
b. How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash?
Foundations of Financial Management
Block, Hirt and Danielsen
Problem 7-1
Instructions
Enter formulas below to complete the requirements of this problem.
Information provided:
Daily collections $4,000,000
Reduction in collection time 2.5 days
Daily disbursements $3,000,000
Increase in disbursement time 1.5 days
Interest rate 6%
a. If the firm has $4 million per day in collections and $3 million per day in disbursements, how many dollars has
the cash management system freed up?
Dollars freed up $14,500,000
b. How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash?
Short-term investment earnings $870,000
Solution
Problem 7-11
Objective: Aging of accounts receivable
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Route Canal Shipping Company has the following schedule for aging of accounts receivable:
(1) (2) (3) (4)
Age of Percent of
Month of Sales Account Amounts Amount Due
April 0-30 $105,000
March 31-60 60,000
February 61-90 90,000
January 91-120 45,000
Total receivables $300,000 100%
a. Fill in column (4) for each month.
b. If the firm had $1,440,000 in credit sales over the four-month period, compute the average collection period.
Average daily sales should be based on a 120-day period.
c. If the firm likes to see its bills collected in 30 days, should it be satisfied with the average collection period?
d. Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the
company be satisfied?
e. What additional information does the aging schedule bring to the company that the average collection period
may not show?
Block, Hirt and Danielsen
Foundations of Financial Management
Age of Receivables
April 30, 2010
Problem 7-11
Instructions
Enter formulas, data, and text to complete the requirements of this problem.
a. Fill in column (4) for each month.
Route Canal Shipping Company
(1) (2) (3) (4)
Age of Percent of
Month of Sales Account Amounts Amount Due
April 0-30 105000 35%
March 31-60 60000 20%
February 61-90 90000 30%
January 91-120 45000 15%
Total receivables $300,000 100%
b. If the firm had $1,440,000 in credit sales over the four-month period, compute the average collection period.
Average daily sales should be based on a 120-day period.
Average collection period $25 days
c. If the firm likes to see its bills collected in 30 days, should it be satisfied with the average collection period?
Yes, the average collection of 25 days is less than 30 days.
d. Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the
company be satisfied?
No. The aging schedule provides additional insight that 65 percent of the accounts receivable are over 30 days old.
Solution
Problem 7-16
Objective: Level versus seasonal production
Student Name:
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Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under
level production, and aftertax costs would decline by $30,000, but inventory costs would increase by $250,000
Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5 percent.
a. Should the company go ahead and switch to level production?
b. How low would interest rates need to fall before level production would be feasible?
Block, Hirt and Danielsen
Foundations of Financial Management
Problem 7-16
Instructions
Enter formulas to complete the requirements of this problem.
Information provided:
Inventory increase $250,000
Interest rate 13.50%
Cost savings $30,000
a. Should the company go ahead and switch to level production?
Savings 30,000
Less: Increased costs (33,750)
Loss (3,750)
Don’t switch to level production. Increased ROI is less than the interest cost of more inventory.
b. How low would interest rates need to fall before level production would be feasible?
Interest rates would need to fall to: 12.00% or less for the switch to be feasible.
Solution