What would be the company optimal amount borrowed

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Reference no: EM132187129

Christie Levine is the manager of the Instant Paper Clip Office Supply Company in Louisville. The company attempts to gain an advantage over its competitors by providing quality customer service, which includes prompt delivery of orders by truck or van and always being able to meet customer demand from its stock. In order to achieve this degree of customer service, it must stock a large volume of items on a daily basis at a central warehouse and at three retail stores in the city and suburbs. Christie maintains these inventory levels by borrowing cash on a daily basis from the First American Bank. She estimates that for the coming fiscal year the company's demand for cash to pay for inventory will be $17,000 per day for 305 working days. Any money she borrows during the year must be repaid with interest by the end of the year. The annual interest rate currently charged by the bank is 9%. Any time Christie takes out a loan to purchase inventory, the bank charges the company a loan origination fee of $1200 plus 2 ¼ points (2.25% of the amount borrowed).

Christie often uses EOQ analysis to determine optimal amounts of inventory to order for different office supplies. Now she is wondering if she can use the same type of analysis to determine an optimal borrowing policy.

Answer the following questions. Please explain.

1. (A) Determine the amount of the loan Christie should borrow, (B) the total annual cost of the company’s policy, AND (C) the number of loans that the company should obtain during the year. This is a 3-part question

2. Determine the level of cash on hand at which the company should apply for the new loan given that it takes the bank 15 days for the loan to be processed by the bank.

3. Suppose the bank offers Christie a discount as follows. On any loan amount equal to or greater than $500,000, the bank will lower the number of points charged on the loan origination fee from 2.25% to 2.00%. What would be the company's optimal amount borrowed?

Reference no: EM132187129

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