Question

1) Consider the case of the Cast Iron Company. On each nondelinquent sale, Cast Iron receives revenues with a

present value of $1,230 and incurs costs with a present value of $1,000. Cast Iron’s costs have increased from $1,000 to $1,080. 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? (Do not round intermediate calculations.)

Expected Profit _______ per sale

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

• Grant
• Refuse

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

Break-even probability _____%

2) Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 350 payments a day will be made to lock boxes with an average payment size of $2,500. The bank’s charge for operating the lock boxes is $0.30 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.)

Daily Interest Saved ______

b. Is it worthwhile to adopt the system?

• Yes
• 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.)

Minimum Reduction in time _____ days

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