Question

Q.1 Anne Teak, the financial manager of a furniture manufacturer, is

considering operating a lock-box system. She forecasts that 650 payments a day will be made to lock boxes with an average payment size of $2,000. The bank’s charge for operating the lock boxes is $0.40 a check. The interest rate is 0.012% per day.

a. If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.)

b. Is it worthwhile to adopt the system?

Yes OR No

 c. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Q.2 Consider the case of the Cast Iron Company. On each nondelinquent sale, Cast Iron receives revenues with a present value of $1,310 and incurs costs with a present value of $1,000. Cast Iron’s costs have increased from $1,000 to $1,160. Assuming that there is no possibility of repeat orders and that the probability of successful collection from the customer is p = 0.95, answer the following.

a-1. What is the expected profit of granting credit? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

a-2. Should Cast Iron grant or refuse credit?

Grant OR Refuse

b. What is the break-even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.)

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