FINC620 – DAVENPORT – QUIZ 5 100% CORRECT SOLUTION.
| 1. Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 105 units have been made by customers requesting credit. The variable cost is $8,400 per unit, and the credit price is $10,250 each. Credit is extended for one period. The required return is 1.2 percent per period. If Solar Engines extends credit, it expects that 20 percent of the customers will be repeat customers and place the same order every period forever, and the remaining customers will place one-time orders. |
| Calculate the NPV of the decision to grant credit. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 2. Tidwell, Inc., has weekly credit sales of $18,500, and the average collection period is 52 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable figure? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| 3. The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.0 percent per period. |
| Current Policy | New Policy | |||||
| Price per unit | $ | 62 | $ | 64 | ||
| Cost per unit | $ | 34 | $ | 34 | ||
| Unit sales per month | 2,600 | ? | ||||
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| What is the break-even quantity for the new credit policy? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| 4. Air Spares 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 $2.055 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 125 such orders is never collected. The required return is 2.0 percent per period. | |||
| a-1. | What is the NPV per engine purchased on credit? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) | ||
| a-2. | Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended. | ||
| b. | What is the break-even probability of default in part (a)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) | ||
| c-1. | Suppose that customers who don’t default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. What is the NPV per engine purchased on credit? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) | ||
| c-2. | Assuming the customer becomes a repeat customer, what is the break-even probability of default?(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) | ||
| 5. Bell Tolls, Inc., has an average collection period of 58 days. Its average daily investment in receivables is $91,100. |
| What is the receivables turnover? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616)) |
What are annual credit sales? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
