Assignment

Measuring Cash Conversion Cycle.

John Gray is really concerned that his companys working capital is not being managed efficiently. He decides to take a look at the firms operating and cash conversion cycles to see whats going on. Using the data provided below, help John measure his firms collection, production, payment, operating, and cash conversion cycles respectively.

Cash sales

$350,000

Credit sales

$600,000

Total sales

$950,000

Cost of goods sold

$600,000

Blank Ending Balance Beginning Balance

Accounts receivable $45,000 $32,000

Inventory $22,000 $9,000

Accounts payable $6,000 $5,000

Assignment

Credit screening cost-benefit analysis

Mid-West Marine Products currently sells its light-weight boat lifts for $3,500 each. The unit cost of each lift is $2,600.

On average, the firm sells 2000 lifts a year on a cash basis. Consumer credit check is offering Mid-West a credit screening system at the rate of $25 per screen, and assures them that the system will be at least 99% accurate. Mid-Wests research indicates that if they offer credit terms, it will boost their sales by 40% per year. They have also learned that the typical default rate in their industry is around 3%.

a. Should Mid-West start offering credit terms?

b. If they do offer credit, should they do so with or without CCCs credit screening services? Please explain.

Assignment

Cost of foregoing cash discounts

Your raw material supplier has been accepting payments on 30-day terms with no interest penalty.

Recently, you received an invoice which stated that the supplier would offer terms of 1 10, net 30.

You have a line of credit with your bank at an EAR of 14.5% per year on outstanding loans.

Should you accept the discount offer? Please explain why or why not.