Test bank fundamentals of corporate finance 9th edition chap020

Chapter 20 - Credit and Inventory Management Chapter 20 Credit and Inventory Management Multiple Choice Questions Blackwell Brothers sells men's suits The store offers a percent discount if payment is received within 10 days Otherwise, payment is due within 30 days This credit offering is referred to as the: A terms of sale B credit analysis C collection policy D payables policy E collection float Jillian was recently hired by a major retail store Her job is to determine the probability that individual customers will fail to pay for their charge sales Jillian's job best relates to which one of the following? A terms of sale B credit analysis C collection policy D payables policy E customer service Town Hardware sells goods on credit with payment due 30 days after purchase If payment is not received by the 30th day, the store mails a friendly reminder to the customer If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer These procedures are referred to as the store's: A customer service policy B credit policy C collection policy D payables policy E disbursements policy 20-1 Chapter 20 - Credit and Inventory Management Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the date of service This 30-day period is referred to as the: A payables period B cash cycle C transactions period D credit period E disbursement period Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday Today, the store issued a bill for these items and mailed it to Scott What is the name given to this bill? A ledger statement B warranty C indenture D receipt E invoice Geoff Industries offers its credit customers a percent discount if they pay within 10 days This discount is referred to as a: A cash discount B purchase discount C collection discount D market discount E receivables discount Any written proof that a customer owes you money for goods or services provided is referred to as a(n): A account document B sales draft C credit instrument D commercial paper E letter of debt 20-2 Chapter 20 - Credit and Inventory Management You are viewing a graph which compares costs with the amount of credit extended Both the carrying costs and the opportunity costs of credit are depicted What is the function called that represents the summation of these carrying and opportunity costs? A opportunity cost curve B credit extension curve C credit cost curve D terms of sale graph E optimal sales graph Assume that RSF is a wholly-owned subsidiary of the Rolled Steel Company RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company Which one of the following terms describes RSF? A credit department B parent company C captive finance company D credit union E service unit 10 The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are: A conditions, control, cessation, capital, and capacity B conditions, character, capital, control, and capacity C capital, collateral, control, character, and capacity D character, capacity, control, cessation, and collateral E character, capacity, capital, collateral, and conditions 11 Roger's Home Appliances offers credit to customers it deems worthy of this privilege To determine if a customer is worthy, the firm computes a numerical value which is used to estimate the probability that the customer will default if credit is granted to them The process of computing this numerical value is referred to as: A credit scoring B credit capacity C receipts assessment D conditions for credit E consumer analysis 20-3 Chapter 20 - Credit and Inventory Management 12 You have recently been hired as an accounting intern for Jefferson Mills The job that you have been assigned for today is to compile a spreadsheet that has six columns The column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90 days; > 90 days You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today Once you have completed that, you are to sort the report by customer name and then total the amounts listed in each column What is this report called? A credit report B aging schedule C risk assessment report D turnover delineation E receivables consolidation report 13 Bill is in charge of the inventory for Home Builder's Supply As an inventory item gets low, he is to restock the item by a quantity that minimizes the total inventory costs for that item What is this restocking quantity called? A short order quantity B refill unit quantity C economic order quantity D minimum stock level E re-order limit 14 Allison has developed a set of procedures for determining the amount of each raw material that she needs to have in inventory if she is to keep her firm's assembly lines operating efficiently These procedures are commonly referred to by which one of the following terms? A first-in, first-out method B the Baumol model C net working capital planning D economic order procedures E materials requirements planning 20-4 Chapter 20 - Credit and Inventory Management 15 Which one of the following is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm? A just-in-time inventory B turnover planning C net working capital planning D inventory scoring E inventory ranking 16 The terms of sale generally include which of the following? I type of credit instrument II cash discount III credit period IV discount period A I and III only B II and IV only C III and IV only D II, III, and IV only E I, II, III, and IV 17 What is the primary purpose of credit analysis? A determine the optimal credit period B establish the effectiveness of granting a cash discount C determine the optimal discount period, if any D access the frequency and amount of sales by customer E evaluate whether or not a customer will pay 18 The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _ period A float B cash collection C sales D accounts receivable E discount 20-5 Chapter 20 - Credit and Inventory Management 19 Which one of the following will increase a firm's investment in accounts receivables? A a decrease in the number of days for which credit is granted B a decrease in credit sales C an increase in cash sales D a decrease in the average collection period E an increase in average daily credit sales 20 A firm's total investment in receivables depends primarily on the firm's: A total sales and cash discount period B cash to credit sales ratio C bad debt ratio D average collection period and amount of credit sales E amount of credit sales and cash discount percentage 21 Which one of the following time periods is included in the accounts receivable period but not in the cash collection period? A the period of time between the receipt of a check and the availability of those funds B time it takes a firm to process incoming receipts C period of time a check is in the mail D the amount of time that it takes a bank to credit a firm's account for a deposit made E period of time it takes an invoice to reach a customer by mail 22 Which one of the following statements is correct if you purchase an item with credit terms of 1/5, net 15? A If you pay within day, you will receive a percent discount B If you pay within days, you will receive a percent discount C If you not pay within 15 days, you will be charged interest at a 1.5 percent monthly rate D If you pay within 15 days, you will receive a 1/5th percent discount E You must pay the discounted amount within 15 days 20-6 Chapter 20 - Credit and Inventory Management 23 You are doing some comparison shopping Five stores offer the product you want at basically the same price Which one of the following stores offers the best credit terms if you plan on taking the discount? A store A B store B C store C D store D E store E 24 You are doing some comparison shopping Five stores offer the product you want at basically the same price Which one of the following stores offers the best credit terms if you plan to forego the discount? A store A B store B C store C D store D E store E 20-7 Chapter 20 - Credit and Inventory Management 25 Which one of the following statements is correct? A The credit period begins when the discount period ends B The discount period is the length of time granted to a customer to pay for a purchase C The credit period begins on the invoice date D With terms of 2/10, net 30, the net credit period is 20 days E With EOM dating, all sales are assumed to have occurred on the 15th of each month 26 Which two of the following are the key considerations for a seller who is establishing the length of the credit period being offered to a customer? I seller's operating cycle II customer's operating cycle III seller's inventory period IV customer's inventory period A I and II B II and III C III and IV D II and IV E I and IV 27 Which one of the following factors tends to favor longer credit periods? A high consumer demand B lower priced merchandise C increased credit risk D merchandise with low collateral value E increased competition 28 Which one of the following statements is correct in regards to credit periods? A Perishable items tend to have longer credit periods B Items with low markups tend to have longer credit periods C Smaller accounts tend to have longer credit periods D Different customers may be offered different credit periods by the same firm E Newer products tend to have shorter credit periods 20-8 Chapter 20 - Credit and Inventory Management 29 A cash discount of 2/5, net 30: A grants customers 30 days to pay after the discount period expires B offers customers a maximum of 30 days credit C grants free credit for a period of 30 days D charges a higher price to a cash customer than to a customer who pays in days E grants customers days to pay if they want the percent discount 30 Under credit terms of 1/5, net 15, customers should: A always pay on the 15th day B take the percent discount and pay immediately C take the discount and pay on the day following the day of sale D either take the discount or pay on the 15th day E both take the discount and pay on the 15th day 31 A 2/10, net 30 credit policy: A is an expensive form of short-term credit if a buyer foregoes the discount B provides cheap financing to the buyer for 30 days C is an inexpensive means of reducing the seller's collection period if every customer takes the discount D tends to have little effect on the seller's collection period E tends to increase a firm's investment in receivables as compared to a straight net 30 policy 32 The Green Hornet offers a trade discount with terms of 2/5, EOM Assume you purchase an item on credit from The Green Hornet on Monday, November What is the invoice date for this purchase? A November B November C November D November E November 30 20-9 Chapter 20 - Credit and Inventory Management 33 Which one of the following credit instruments is commonly used in international commerce? A open account B sight draft C time draft D banker's acceptance E promissory note 34 A conditional sales contract: A passes title to the goods sold to the buyer at the time the contract is signed B normally calls for one lump sum payment on the contract payment date C generally has a built-in interest cost D is payable immediately upon receipt E is a formal bid for a project 35 Which of the following statements correctly reflect the effects of granting credit to customers? I Total revenues may increase if both the quantity sold and the price per unit increase when credit is granted II A firm's cash cycle generally increases if credit is granted, all else equal III Both the cost of default and the cost of discounts must be considered before granting credit IV A firm may have to increase its long-term borrowing if it decides to grant credit to its customers A I, II, and III only B II, III, and IV only C I, III, and IV only D I, II, and IV only E I, II, III, and IV 20-10 Chapter 20 - Credit and Inventory Management 72 You are trying to attract new customers that you feel could become repeat customers The average selling price of your products is $69 each with a $41 per unit variable cost The monthly interest rate is 1.2 percent Your experience tells you that percent of these customers will never pay their bill What is the value of a new customer who does not default on his or her bill? A $1,986 B $2,333 C $2,617 D $4,817 E $8,867 PV = ($69 - $41)/0.012 = $2,333 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: Repeat sale 73 You are trying to attract new customers that you feel could become repeat customers The average price of your product is $619 per unit with a $435 variable cost per unit The monthly interest rate is 1.8 percent Your experience tells you that percent of these customers will never pay their bill Should you offer credit terms of net 30 to attract these potential customers? Why or why not? A yes; because the NPV of extending credit is $8,867 B yes; because the NPV of extending credit is $9,787 C yes; because the NPV of extending credit is $128 D no; because the NPV of extending credit is -$459 E It doesn't matter because the NPV of extending credit is zero NPV = -$435 + {[1 - 0.9] × [($619 - $435)/0.018]} = $8,867 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-2 Section: 20.5 Topic: Repeat sale 20-66 Chapter 20 - Credit and Inventory Management 74 A firm sells 4,500 units of an item each year The carrying cost per unit is $2.15 and the fixed costs per order are $67 What is the economic order quantity? A 374 units B 421 units C 497 units D 530 units E 623 units EOQ = [(2 × 4,500 × $67)/$2.15]1/2 = 530 units AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Economic order quantity 75 The best-selling pair of roller skates The Teen Store offers sells for $79.99 a pair The store consistently sells 5,700 pairs of these roller skates every year The fixed costs to order more skates is $68 and the carrying costs are $1.95 per pair What is the economic order quantity? A 446 pairs B 515 pairs C 529 pairs D 631 pairs E 648 pairs EOQ = [(2 × 5,700 × $68)/$1.95]1/2 = 631 pairs AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Economic order quantity 20-67 Chapter 20 - Credit and Inventory Management 76 One of the best selling items L.T Ten offers sells for $9.99 a unit The variable cost per unit is $6.38 and the carrying cost per unit is $1.12 The firm sells 7,100 of these units each year The fixed cost to order this item is $75 What is the economic order quantity? A 690 units B 747 units C 975 units D 1,157 units E 1,260 units EOQ = [(2 × 7,100 × $75)/$1.12]1/2 = 975 units AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Economic order quantity 77 Each year you sell 950 units of a product at a price of $899 each The variable cost per unit is $575 and the carrying cost per unit is $16.90 You have been buying 100 units at a time Your fixed cost of ordering is $60 What is the economic order quantity? A 82 units B 95 units C 105 units D 113 units E 124 units EOQ = [(2 × 950 × $60)/$16.90]1/2 = 82 units AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 20-4 Section: 20.8 Topic: Economic order quantity 20-68 Chapter 20 - Credit and Inventory Management 78 Weisbrough United currently has a cash sales only policy Under this policy, the firm sells 410 units a month at a price of $219 a unit The variable cost per unit is $148 and the carrying cost per unit is $3.30 The monthly interest rate is 1.3 percent The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy What is the net present value of the switch using the one-shot approach? A $228,400 B $255,590 C $261,470 D $282,233 E $285,902 Monthly benefit = [($219 × 475)/1.013] - [$148 × 475] - [($219 - $148) × 410] = $3,280.03; NPV of switch = $3,280.03 + ($3,280.03/0.013) = $255,590 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: One-shot approach 79 Under the current cash sales only policy Blue Bird, Inc., will sell 215 units a month at a price of $469 each The variable cost per unit is $305 and the monthly interest rate is 1.7 percent Based on a recent survey, the firm believes it can sell an additional 36 units per month if it offers a net 30 credit policy What is the net present value of the switch using the one-shot approach? A $212,806 B $231,543 C $235,479 D $248,946 E $251,118 Monthly benefit = {[$469 × (215 + 36)]/(1 + 0.017)} - {$305 × (215 + 36)} - {($469 - $305) × 215} = $3,936.23; NPV of switch = $3,936.23 + ($3,936.23/0.017) = $235,479 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: One-shot approach 20-69 Chapter 20 - Credit and Inventory Management 80 Under your current cash sales only policy you sell 132 units a month for a total sales value of $9,240 Your variable cost per unit is $44 and your monthly interest rate is percent Based on a recent survey, you believe that you can sell an additional 22 units per month if you offer a net 30 credit policy What is the net present value of the proposed switch using the accounts receivable approach? A $45,976 B $46,992 C $49,081 D $50,224 E $53,566 P = $9,240/132 = $70 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Accounts receivable approach 81 You are currently selling 72 units a month at a price of $210 a unit Your variable cost of each unit is $130 If you switch from your current cash sales only policy to a net 30 policy you think your sales will increase to a total of 95 units per month The monthly interest rate is 1.5 percent What is the net present value of this proposed switch using the accounts receivable approach? A $104,557 B $114,829 C $134,822 D $136,516 E $141,520 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Accounts receivable approach 20-70 Chapter 20 - Credit and Inventory Management 82 Your current sales consist of 27 units per month at a price of $225 a unit You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy If you decide to switch your credit policy you also plan to increase the sales price to $240 a unit If you make the switch you not expect your total monthly sales quantity to change but you expect a percent default rate The monthly interest rate is 1.5 percent What is the net present value of the proposed credit policy switch? A $6,727 B $6,893 C $7,206 D $7,965 E $8,481 d = ($240 - $225)/$240 = 0.0625 NPV = - ($225 × 27) + {($240 × 27) × [(0.0625 - 0.03)/0.015]} = $7,965 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Discounts and default risk 83 Your current sales consist of 45 units per month at a price of $390 a unit You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy If you decide to switch your credit policy you also plan to increase the sales price to $410 a unit The monthly interest rate is 1.4 percent What is the break-even default rate of the proposed switch? A 3.55 percent B 3.68 percent C 4.29 percent D 4.71 percent E 4.88 percent d = ($410 - $390)/$410 = 0.048780488 π = 0.048780488 - 0.014 (1 - 0.048780488) = 3.55 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.A Topic: Discounts and default risk 20-71 Chapter 20 - Credit and Inventory Management Essay Questions 84 Which you feel is the more appropriate upper limit for the credit period that a seller offers to a buyer: the buyer's operating cycle or the buyer's inventory period? The operating cycle is the sum of the inventory and accounts receivable periods The inventory period is probably the better target as an upper limit for the seller's credit period since it is questionable whether or not the seller should be financing the buyer's receivables The credit period should definitely not exceed the buyer's operating period as the seller would then be financing all of the buyer's inventory and accounts receivables, plus other aspects of the buyer's operations Feedback: Refer to section 20.2 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.2 Topic: Length of credit period 85 Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30 The retail chain consistently takes the percent discount and pays in 60 days When pressed on the issue, the retail chain tells the suppliers they can either accept the payments as they currently are or lose the business Is this ethical? How might this impact a small supplier versus a large supplier? Explain This question can lead to a lively discussion about the ethics of abusing the credit period Some students will argue that it is unethical for the large firm to exercise its will against its suppliers Most would argue that a supplier that is also a relatively large firm will better be able to negotiate with the retail chain and work out a more favorable arrangement than the current situation If a supplier is small, this account may be a significant proportion of the supplier's total sales In that case, the supplier may have no choice other than accepting the terms as dictated by the retail chain or going out of business Whether or not the actions of the retail chain are ethical is debatable, but this practice occurs fairly frequently Feedback: Refer to section 20.2 AACSB: Reflective thinking and Ethics Bloom's: Evaluation Difficulty: Intermediate Learning Objective: 20-2 Section: 20.2 Topic: Ethics and the credit period 20-72 Chapter 20 - Credit and Inventory Management 86 Why might firms forego discounts offered by their suppliers even though it is costly to so? What steps might a firm pursue to be able to take these discounts? Firms will forego discounts when there is insufficient cash flow to pay within the discount period It would be difficult to argue that this type of financing, given the typically high cost of foregoing the discount, would be cheaper than other financing sources available to the firm However, it might be more desirable than raising cash, say through secured inventory financing or factoring receivables As far as correcting the problem, the firm's management needs to seriously review the firm's cash and liquidity policies and make the changes required to improve the firm's liquidity and cash flow situation Feedback: Refer to section 20.2 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-1 Section: 20.2 Topic: Discounts 87 All else equal, firms with (1) excess capacity, (2) low variable costs, and (3) repeat customers are more apt to offer liberal credit terms to their customers than are other firms Explain why this tendency exists Firms with excess capacity are more apt to offer liberal credit terms as a sales incentive as increased sales will also increase the capacity utilization ratio Firms with low variable costs extend credit more liberally as the cost to so is limited to the variable cost of the items sold Finally, firms with repeat customers gain familiarity with its customers' ability to pay, thereby facilitating more liberal credit terms Feedback: Refer to section 20.5 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 20-2 Section: 20.5 Topic: Liberal credit terms 20-73 Chapter 20 - Credit and Inventory Management Multiple Choice Questions 88 The Green Hornet sells earnings forecasts for international securities Its credit terms are 2/10, net 30 Based on experience, 55 percent of all customers will take the discount The firm sells 2,600 forecasts every month at a price of $1,100 each What is the firm's average balance sheet amount in accounts receivable? A $940,274 B $1,408,272 C $1,786,521 D $1,811,012 E $1,915,387 Average collection period = 0.55(10 days) + 0.45 (30 days) = 19 days Average A/R = 2,600 ($1,100) (12/365) (19) = $1,786,521 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-3 Learning Objective: 20-1 Section: 20.2 Topic: Accounts receivable 89 A firm offers terms of 2/9, net 41 What effective annual interest rate does the firm earn when a customer does not take the discount? A 18.67 percent B 20.45 percent C 23.37 percent D 25.34 percent E 25.92 percent EAR = [1 + (0.02/0.98)]365/(41 - 9) - = 25.92 percent AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-5 Learning Objective: 20-1 Section: 20.2 Topic: Terms of sale 20-74 Chapter 20 - Credit and Inventory Management 90 Music City, Inc has an average collection period of 56 days Its average daily investment in receivables is $50,000 What are the annual credit sales? A $268,407 B $307,109 C $325,893 D $728,215 E $767,123 Annual credit sales = $50,000 (365/56) = $325,893 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-6 Learning Objective: 20-1 Section: 20.1 Topic: Receivables turnover 91 The Turn It Up Corporation sells on credit terms of net 30 Its accounts are, on average, days past due Annual credit sales are $7 million What is the company's balance sheet amount in accounts receivable? A $690,411 B $723,333 C $851,667 D $915,407 E $923,593 A/R = $7,000,000 [(30 + 6)/365] = $690,411 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-8 Learning Objective: 20-1 Section: 20.1 Topic: Accounts receivable 20-75 Chapter 20 - Credit and Inventory Management 92 Keep M Flying is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy The variable cost is $1.7 million per unit, and the credit price is $2.1 million each Credit is extended for one period Based on historical experience, payment for about out of every 240 such orders is never collected The required return is 2.8 percent per period What is the NPV per unit if this is a one-time order? A $316,407 B $328,819 C $334,290 D $342,802 E $351,056 NPV = -$1,700,000 + [1 - (1/240)] [$2,100,000]/(1 + 0.028) = $334,290 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-9 Learning Objective: 20-1 Section: 20.3 Topic: Credit policy 20-76 Chapter 20 - Credit and Inventory Management 93 Quest, Inc., is considering a change in its cash-only sales policy The new terms of sale would be one month The required return is 1.6 percent per month Based on the following information, what is the NPV of the new policy? A $28,750 B $32,500 C $35,000 D $38,250 E $40,000 Benefit of switching = ($800 - $425) (1,150 - 1,110) = $15,000 Cost of switching = $800 (1,110) + $425 (1,150 - 1,110) = $905,000 New policy NPV = $15,000/0.016 - $905,000 = $32,500 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-10 Learning Objective: 20-2 Section: 20.3 Topic: Credit policy evaluation 20-77 Chapter 20 - Credit and Inventory Management 94 Cohen Industrial Products uses 2,100 switch assemblies per week and then reorders another 2,100 The relevant carrying cost per switch assembly is $20, and the fixed order cost is $300 What is the EOQ? A 1,279.84 B 1,434.14 C 1,809.97 D 2,278.42 E 2,698.15 EOQ = [(2 × 52 × 2,100 × 300)/$20]½ = 1,809.97 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-11 Learning Objective: 20-4 Section: 20.8 Topic: EOQ 95 Roger's Store begins each week with 150 phasers in stock This stock is depleted each week and reordered The carrying cost per phaser is $48 per year and the fixed order cost is $70 What is the optimal number of orders that should be placed each year? A 48.69 B 51.71 C 54.20 D 61.10 E 64.50 EOQ = [(2 × 52 × 150 × $70)/$48]1/2 = 150.83 Number of orders per year = 52(150)/150.83 = 51.71 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 20-12 Learning Objective: 20-4 Section: 20.8 Topic: Optimal order quantity 20-78 Chapter 20 - Credit and Inventory Management 96 The Dilana Corporation is considering a change in its cash-only policy The new terms would be net one period The required return is percent per period What is the NPV of the new policy given the following information? A -$230,880 B -$118,420 C $311,508 D $428,997 E $566,840 Cash flow from old policy = ($70 - $36) (3,500) = $119,000 Cash flow from new policy = ($74 - $36) (3,560) = $135,280 Incremental cash flow = $135,280 - $119,000 = $16,280 NPV of new policy = - [$70(3,500) + $36(3,560 - 3,500)] + $16,280/0.02 = $566,840 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 20-14 Learning Objective: 20-2 Section: 20.5 Topic: Credit policy 20-79 Chapter 20 - Credit and Inventory Management 97 The Cycle Shoppe has decided to offer credit to its customers during the spring selling season Sales are expected to be 330 bicycles The average cost to the shop of a bicycle is $300 The owner knows that only 93 percent of the customers will be able to make their payments To identify the remaining percent, she is considering subscribing to a credit agency The initial charge for this service is $540, with an additional charge of $6 per individual report What is the amount of the net savings from subscribing to the credit agency? A $3,790 B $3,920 C $4,080 D $4,410 E $4,950 Net savings = (330 × $300 × 0.07) - $540 - (330 × $6) = $4,410 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 20-16 Learning Objective: 20-2 Section: 20.5 Topic: Credit policy 20-80 ... will pay 18 The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _ period A float... incoming receipts C period of time a check is in the mail D the amount of time that it takes a bank to credit a firm's account for a deposit made E period of time it takes an invoice to reach... instruments is commonly used in international commerce? A open account B sight draft C time draft D banker's acceptance E promissory note 34 A conditional sales contract: A passes title to the goods