What are the shortcomings of the eoq?

Assignment Help Finance Basics
Reference no: EM13880411

Assignment : Working Capital Management, EOQ, and External Funds

Part One: Working Capital Analysis

Capers, Inc. has just promoted you to Chief financial officer. Since this is a new office in the company, you are understaffed and many of the responsibilities have been assigned to you.

The first task you have been assigned concerns the cash conversion cycle. Your boss has asked that you examine the following data:

1. Inventory conversion period is 60 Days

2. Payables deferral period is 30 days

3. Receivables collection period of 40 days

The second task concerns the cost of bank loans under differing conditions. Specifically:

1. The company needs $1,500,000 for a new project.

2. The loan will cost 10% simple interest, for 4 months, with a 20% compensating balance.

Required:
1. What is the firm's cash conversion cycle?

2. How many times per year is the firm's inventory turnover, if sales are $4,000,000 per year?

3. If sales are all credit sales and amount to $4,000,000 per year, what is the firm's average investment in receivables?

4. What is the nominal interest rate on the loan?

Part Two: Cash Budget

Capers, Inc. is developing its cash budget for the next year. Of Capers' sales, 20% is for cash, another 60% is collected in the month following sale, and 20% is collected in the second month following sale. November and December sales for 2010 were $229000 and $250,000, respectively.

Capers' purchases its raw materials two months in advance of its sales equal to 70% of its final sales price. The supplier is paid one month after it makes delivery. For example, purchases for April sales are made in February, and payment is made in March.

In addition, Capers pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments for $32,000 are made each quarter beginning in March.

The company's cash balance at December 31, 2010, was $26,000 and minimum balance of $25,000 must be maintained at all times. Assume that any short-term financing needed to maintain cash balance would be paid off in the month following the month of financing if sufficient funds are available.

Interest on short-term loans (12%) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. For example, if in the month of April the firm expects to have a need for an additional $60,500, these funds would be

borrowed at the beginning of April with interest of $605 (.12 x 1/12 x $60,500) owed for April and paid at the beginning of May.

January

$229,000

February

$250,000

March

$270,000

April

$275,000

May

$280,000

June

$290,000

July

$280,000

August

$260,000

Required:

• Prepare a monthly cash budget for Capers Inc. covering the first 7 months of 2010.

Part Three: EOQ

Capers Inc. is also initiating an inventory management program using EOQ. Capers needs fastener supplies to manufacture its products. The CFO estimates that the company will need about 250,000 cases next year. The cost of storing cases is about $1.10 each.

The ordering cost is $400 for a shipment.

Required:

1. What is the EOQ?

2. How many times will you order?

3. What are the shortcomings of the EOQ? What is your rationale?

• showing all calculations, and in good form.

Reference no: EM13880411

Questions Cloud

What is the developer''s most profitable site : What is the developer's most profitable site? Suppose the developer negotiates with a number of towns. At which site would you predict the final agreement to be reached? Does this site generate maximum net benefits?
List the six major categories of occupational illnesses : List the six major categories of occupational illnesses, and give three examples of each. What are some methods that can be used to control potential exposures in the workplaceDiscuss safe practices that can be used for working with chemicals in labo..
Work breakdown structure for the construction of building : Prepare a Work Breakdown Structure for the construction of the building. You should use all of the tasks the case has described as well as adding at least 10 of your own. It is NOT expected that the WBS be in MS Project, a Microsoft Word document ..
The lease at the end of two years for an additional : 2. Prepare an amortization schedule for the term of the lease.
What are the shortcomings of the eoq? : What are the shortcomings of the EOQ? What is your rationale?
Consider nodal configuration : Consider nodal configuration 2 of Table 4.2. Derive the finite-difference equations under steady-state conditions for the following situations.
Joel henry founded bookmart com at the beginning of august : Joel Henry founded Bookmart.com at the beginning of August, which sells new and used books online. He is passionate about books but does not have a lot of accounting experience. Help Joel by preparing journal entries for the following events. If the ..
Calculate the dimensionless parameters : Consider conditions for which a fluid with a free stream velocity of V = 1 m/s flows over an evaporating or subliming surface with a characteristic length of L = 1 m, providing an average mass transfer convection coefficient of hm, = 10-2 m/s. Cal..
Which of the two rates would it set : Could a private developer profitably build and operate the garage? Which of the two rates would it set? (Assume it faces the same demand, costs, and discount rate as the city.)

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd