# Homework 9

Chapter 15 P1

Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstanding an average of 35 days, and the firm receives forty days of credit on its purchases from suppliers.

a. Estimate the average length of the firm’s short- term operating cycle. How often would the cycle turn over in a year?

Cash conversion cycle; formula DIO+DSO=DPO

15(days before they are sold) +35(outstanding and average days) = 50 days. Operation starts from the point the company received material till the point of sale.

(365/50=7.2)

The cycles would run over a 50 day period. The total number of cycle per year would be a little over 7 cycles.

b. Assume net sales of \$ 1,200,000 and cost of goods sold of \$ 900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?

The average investment would need to be at the least \$53, 424.66.

Average revenue = \$1,200,000/365 = \$3287.67

Average cost of goods sold = \$900,000/365 = \$2465.753

Formula DIO= (COGS/days) = 15 days

Average Inventory \$36,986.30

Average AR/ Revenue Per day =

Revenue per day = \$3287.67 = Average AR/ \$3287.67 = 35 days

Average AR = \$115, 068.50

DPO = Average AP / COGS per day = Average AP/(\$900,000/365)=40 days

Average AP is \$98,630.14

Average Invest + Aver AR- Average AP= \$53,424.66

Chapter 16 P1

A supplier is offering your firm a cash discount of 2% if purchases are paid for within ten days; otherwise the bill is due at the end of sixty days. Would you recommend borrowing from a bank at an 18 percent annual interest rate to take advantage of the cash discount offer? Determine both the Nominal Annual Rate (Cost) and the Effective Annual Rate (Cost). Explain your answer.

Nominal Annual Rate (Cost) = % Discount/(100% – % Discount) X 365 Days/(Credit Period – Discount Days)
Nominal Annual Rate (Cost) = 2/(100 – 2) * 365/(60 – 10)
Nominal Annual Rate (Cost) = 2/98 *365/50
Nominal Annual Rate (Cost) = .020408 * 7.2
Nominal Annual Rate (Cost) = .146939 = 14.7%
Effective Annual Rate (Cost) = (1+r)^n -1

Without even going through the whole calculation piece, from the interest rate alone I wouldn’t recommend borrowing from the bank to take advantage of the trade credit. It would be cheaper in the long run to just pay the full amount in the 60 days versus paying the full amount and 18% interest from the bank.