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F9-chapter 5
官方认可黄金级培训机构，数千学员一致选择 http:// Chapter55. Managing working capitalChapter GuideC2. Management of inventories, accounts receivable, accounts pay
able and cash a) Discuss, apply and evaluate the use of relevant techniques in managing inventory, including the Economic Order Quantity model and Just-in-Time techniques. b) Discuss and evaluate the use of relevant techniques in managing accounts receivable, including: i. Assessing creditworthiness ii. Managing accounts receivable iii. Collecting amounts owing iv. Offering early settlement discounts v. Using factoring and invoice discounting vi. Managing foreign accounts receivable c) Discuss and apply the use of relevant techniques in managing accounts payable, including: i. Using credit effectively ii. Evaluating the benefits of discounts for early settlement and bulk discounts iii. Managing foreign accounts payable59中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Chapter OverviewWorking capital managementInventoryTrade receivableTrade payableEOQ Bulk discount Buffer safety inventory JITSettlement discount Factoring Invoice discountTrade credit60中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// 1. Managing inventory The balancing act between liquidity and profitability, which might also be considered to be a trade-off between holding costs and stock out /re-order costs, is key to any discussion on inventory management. The objective of good inventory management is therefore to determine: ? The optimum re-order level C how many items are left in inventory when the next order is placed, and ? The optimum re-order quantity C how many items should be ordered when the order is placed 1.1 Practical approach ? High value stock items, requiring careful stock control using sophisticated methods such asthe EOQ method discussed below with regular review and control ? Medium value stock items, as above but with less frequent review ? Low value stock items, aim to keep a continuous availability 1.2 Basiceconomic order quantity (EOQ) model The order quantity affects a firm’s total inventory costs, these are: Holding costs ? Warehousing and handling cost ? Insurance ? Obsolescence ? Opportunity cost of capital Ordering costs ? Admin &delivery costs. Shortage costs ? Contribution from lost sales ? Extra cost of emergency inventory ? Cost of lost production and sales in a stock-out.61中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// The model uses the following terms: ? D = Annual demands in units ? Co = Cost of placing one order ? Ch = Annual cost of holding one unit in stock ? P = Purchase price per unit ? Q = Re-Order QuantityAnnual cost Total cost Holding costsOrdering costsEOQRe-order quantityHolding Cost = (Ch x Q)/2 (average inventory) Ordering Cost = Co x D/Q (number of orders) Total inventory cost = Holding cost + Ordering cost Total costs will always be minimised at the point where the total holding costs equals the total ordering costs. This point will be the economic order quantity.
= ? Lecture example 1 Firm X faces regular demand of 150 units per month, it orders from its supplier at a purchase cost per unit of ?25. Each order costs ?32, and holding cost is ?4.5 p.a. and remains at this level. Required a) Calculate the economic order quantity, and the average inventory level. b) Calculate total inventory related cost at this economic order quantity.622CoD Ch中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Lecture example 2 Monthly demand for a product is 10,000 units. The purchase price is $10/unit and the company’s cost of finance is 15% pa. Warehouse storage costs per unit pa are $2/unit. The supplier charges $200 per order for delivery. Required Calculate the EOQ, and the total inventory cost.1.3 Effect of discounts Discounts may be available if the order quantity is above a certain size. Thus this needs to be considered in determining the best order quantity. The following 4 step approach should be used: i. ii. iii. iv. Calculate EOQ in normal way Calculate annual costs using EOQ Calculate annual costs at the lower boundary of each discount above the EOQ Select order quantity which minimises costs.Lecture example 3 The annual demand for an item of inventory is 125 units. The item costs $200 a unit to purchase, the holding cost for one unit for one year is $30 and ordering costs are $300 per order. The supplier offers : 1) 3% discount for orders of 60 units or more, and 2) Discount of 5% for orders of 90 units or more. Required Calculate the optimum ordering size63中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Lecture example 4 Firm X faces regular demand of 150 units per month, it orders from its supplier at a purchase cost per unit of ?25. Each order costs ?32, and holding cost is $4.5 p.a. per unit. Required Calculates the minimum total cost assuming the following discount applies: 1. Discount of 1% given on orders of 150 and over 2. Discount of 2% given on orders of 300 and over 3. Discount of 4% given on orders of 800 and over.1.4Drawbacks of EOQ ? Assumes 0 lead times, and 0 bulk purchase discounts C although these can be adjusted for as shown above ? Ignores the possibility of supplier shortages or price rises ? Ignores fluctuations in demand ? Ignores the benefit of holding stock to customers (choice, short lead times) ? Ignores the hidden costs of holding stock64中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// 1.5Uncertainties in demand and lead time Uncertainties in demand and lead time taken to fulfill orders mean that inventory will be ordered once it reaches a re-order level Re-order level = maximum usage x maximum lead time 1.6Maximum and buffer safety inventory level Maximum inventory level = re-order level + re-order quantity C(minimum usage x minimum lead time) Buffer safety inventory = re-order level C (average usage x average lead time) The expected usage during the lead time requires buffer stock (B) to be held, and the average stock level becomes B + Q/2. Average inventory = buffer safety inventory + re-order amount/2QuantityQuantity Average Inventory = B + Q/2Average Inventory = Q/2BTimeTimeLecture example5 A company has an inventory management policy which involves ordering 50,000 units when the inventory level falls to 15,000 units. Forecast demand to meet production requirement during the next year is 310,000 units. You should assume a 50 week year and that demand is constant throughout the year. Orders are received two weeks after being placed with the supplier. What is the average inventory level?65中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// 1.7 JIT (just-in-time) system JIT is a term which describes a policy of obtaining goods from suppliers at the latest possible time and so avoiding the need to carry any materials or components inventory. ? 1.7.1 Benefit of JIT Reduced inventory levels mean that a lower level of investment in working capital will be required. And lead to following benefits: a) b) c) d) e) f) g) h) i) Reduction in inventory holding costs Reduced manufacturing lead times Improved labour productivity Quick response to customer requirements Great production flexibility(adapt to customer needs) Faster / high quality suppliers More motivated staff who care about quality Faster delivery of high quality products Cost savings from carrying lower stock? 1.7.2 Limitations of JIT a) Not suitable for business operate under volatile environment. b) Success largely depend on the reliability of suppliers c) Costly2. Managing receivables (debtors) 2.1 Policy formulation The decision to offer credit can be viewed as an investment decision, resulting in higher profits. For many businesses offering generous payment terms to customers is essential in order to be competitive.66中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Lecture example 6 Greedy Ltd is considering a proposal to change its credit policy from allowing debtors credit of 2 months to credit of 3 months. Sales are currently ?600,000 p.a. and as a result of the proposed change will increase by 15%. The contribution/ sales ratio is 20% and the cost of capital is 10%. Required Should the proposed change be made?2.2 Framework for managing receivables To keep control over the level of the level of debtors it is important to have an effective debtors policy which include: a) Credit analysis system b) Credit control system c) Debt collection system ? 2.2.1 Credit analysis system Before offering credit to particular customer, it is important to analyse the risk of trading with that customer by asking for bank references and trade references. A credit rating agency will also provide details on a customer’s trading history, debt levels and payment performance. a) New customers should give two good references, b) Credit ratings might be checked through a credit rating agency. c) A new customer's credit limit should be fixed at a low level and only increased if his payment record subsequently warrants it/ d) For large value customers, a file should be maintained of any available financial information about the customer. This file should be reviewed regularly. Information is available form: e) The Department of Trade and Industry and the Export Credit Guarantee Department will both be able to advice on overseas companies. f) Press comments g) Send a member of staff to visit the company concerned,67中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// ? 2.2.2 Credit control system After credit analysis, a decision will be taken on the credit limit to be offered. It is important that this is not exceeded without senior management approval. Credit limits should also be regularly reviewed. ? 2.2.3 Debt collection system On a regular basis a company should: ? Prepare an aged listing of debtors ? Issue regular statements and reminders ? Have clear procedures for taking legal action or charging interest ? Consider the use of a debt factor (considered later) ? Analyse whether to use cash discounts to encourage early paymentIllustration Let us assume that the Zygo Company sells widget for $1,000, which enables it to earn a profit, after all other expenses except interest, of $100 (i.e. a 10% margin). a) Aibee buys a widget for $1,000 on 1 January 20×1, but does not pay until 31 December 20×1.Zygo relies on overdraft finance, which costs it 10% pa. The effect is: $ Net profit on sale of widget 100 -100 Overdraft cost $1,000×10% pa Actual profit after 12 months credit Nil In other words, the entire profit margin has been wiped out in 12 months. b) If Aibee had paid after six months, the effect would be: Net profitOverdraft cost $1,000 × 10% pa × 6 months 12$ 100 -50 50Half the profit has been wiped out.68中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Lecture example 7 Russian Beard Co is considering a change of credit policy which will result in an increase in the average collection period from one to two months. The relaxation in credit is expected to produce an increase in sales in each year amounting to 25% of the current sale volume. Selling price per unit Variable cost per unit Current annual sales $10 $8.50 $2,400,000The required rate of return on investments is 20%. Assume that the 25% increase in sales would result in additional inventories of $100,000 and additional accounts payable of $20,000. Advise the company on whether or not to extend the credit period offered to customers, if: a) All customers take the longer credit of two months b) Existing customers do not change their payment habits, andonly the new customers take a full two months credit2.3 Early settle payment discount Early settlement discounts may be employed to shorten average credit periods, and to reduce the investment in accounts receivable and therefore interest costs. The benefit in interest cost saved should exceed the cost of the discounts allowed. To see whether the offer of a settlement discount (for early payment) is financially worthwhile we must compare the cost of the discount with the benefit of a reduced investment in accounts receivable. Varying the discount allowed for early payment of debts affects the average collection period and affects the volume of demand (and possibly, therefore, indirectly affects bad debt losses). We shall begin with examples where the offer of a discount for early payment does not affect the volume of demand.69中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Lecture example 8 Lowe and Price Co has annual credit sales of $12,000,000, and three months are allowed for payment. The company decides to offer a 2% discount for payment made within ten days of the invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount. If the company requires a 20% return on investments, what will be the effect of the discount? Assume that the volume of sales will be unaffected by the discount.70中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// 2.4 Bad debt risk Lecture example 9 Grabbit Quick Co achieves current annual sales of $1,800,000. The cost of sales is 80% of this amount, but bad debts average 1% of total sales, and the annual profit is as follows. $ 1,800,000 (1,440,000) 360,000 (18,000) 342,000Sales Less cost of sales Less bad debts ProfitThe current debt collection period is one month, and the management consider that if credit terms were eased (option A), the effects would be as follows. Present policy Option A Additional sales (%) 25% － Average collection period 1 month 2 months Bad debts (% of sales) 1% 3% The company require a 20% return o its investments. The costs of sales are 75% variable and 25% fixed. Assume there would be no increase in fixed costs from the extra turnover, and that there would be no increase in average inventories or accounts payable. Which is the preferable policy, Option A or the present one?71中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// 2.5 Factoring Factoring is an arrangement to have debts collected by a factor company, which advances a proportion of the money it is due to collect. ? 2.5.1 Types of factoring There are two types of factoring ? Recourse service ? Factors do not take over firm’s administration of invoicing and debt collection ? Factors do not take over the default risk from clients ? This service is similar to a secured loan. ? Non-recourse service ? Factor take over the administration of the client's invoicing, sales accounting and debt collection service. ? Credit protection for the client's debts, the factor takes over the risk of loss from bad debts. This is known as a non-recourse service. However, if a non-recourse service is provided the factor, not the firm, will decide what action to take against non-payers. ? Making payments to the client in advance of collecting the debts. ? 2.5.2 Benefits of factoringAdvantagesDisadvantages? Saving in staff time/administration ? Possible loss of customer costs goodwill if too aggressive at ? Providing a new source of finance chasing for payment to help with short term liquidity ? Sometimes viewed as an ? Growth can be financed thought indication that the company is rather than by injecting fresh in financial difficulty external capital ? The business can pay its suppliers promptly, and so be able to take advantage of any early payment discounts that are available. ? Optimum inventory levels can be maintained72中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Lecture example 10 A company makes annual credit sales of $1,500,000. Credit terms are 30 days, but its debt administration has been poor and the average collection period has been 45 days 0.5% of sales resulting in bad debts which are written off. A factor would take on the task of debt administration and credit checking, at an annual fee of 2.5% of credit sales. The company would save $30,000 a year in administration costs. The payment period would be 30 days. The factor would also provide an advance of 80% of invoiced debts at an interest rate of 14% (3% over the current base rate). The company can obtain an overdraft to finance its accounts receivable at a rate of 2.5% over base rate. Should the factor's services be accepted? Assume a constant monthly turnover. 2.6 Invoice discounting ? Invoice discounting is related to factoring and many factors will provide discounting service. It is the purchase of a selection of invoices, at a discount. ? The invoice discontent does not take over the administration of the client's sales ledger. 2.7Managing foreign accounts receivable Exporting carries a high risk of slow or nonpayment by customers, and requires closercontrol, this can involve: (a) Letters of credit The customer’s bank guarantees it will pay the invoice after delivery of the goods. (b) Bills of exchange An IOU signed by the customer. Until it is paid, shipping documents that transferownership to the c it can also be sold to raise finance (c) Invoice discounting Sale of selected invoices to a debt factor, the firm keeps control of its sales ledger. (d) Export factoring ? invoicing & debt collection ? cash advances in advance of the debtor paying73中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// ? Optional bad debt insurance (if used this is non-recourse factoring). Lecture example 11 A company with export sales of $480m pa has an average collection period of 3 months, bad debts are 2%. A factoring company will provide non-recourse factoring for a fee of 5% of revenue. As a result of this, administration savings will be made of ?8m p.a. and the credit period will fall to 2 months. The company has a cost of capital of 10%, and the exchange rate is currently: 2 $/?. Required Assess, in ?s, whether the factor should be used.3.Managing trade payables 3.1 Importance of managing trade payables ? It is important that when suppliers offer credit, invoice an exception to this is when early payment discounts are offered. ? It is also important to be careful that when suppliers offer credit, invoices are not paid so late that this endangers the firm’s long term relationship with the supplier. The benefits of a long term relationship include: a. Better quality b. Lower stock c. Lower switching costsLecture example 12 Pips Limited has been offered a discount of 2.5% for an early settlement by a major supplier from which it purchases goods worth ?1,000,000 each year. Pip’s normal payment terms are 30 days, early settlement requires the payment to be made within 10 days. Currently Pips has an overdraft on which it is paying 10% interest. Required Assess whether Pips should take the discount and settle the invoice after 10 days.74中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Lecture example 13 X Co has been offered credit terms form its major supplier of 2/10, net 45. That is, a cash discount of 2% will be given if payment is made within ten days of the invoice, and payments must be made within 45 days of the invoice. The company has the choice of paying 98c per $1 on day 10(to pay before day 10 would be unnecessary), or to invest the 98c for an additional 35 days and eventually pay the supplier $1 per $1. The decision as to whether the discount should be accepted depends on the opportunity cost of investing 98c for 35 days. What should the company do? (Assume that investment can generate a return at 25% p.a)3.2Managing foreign accounts payable To avoid the risk of the ? weakening by the time an invoice is due to be paid, companies sometimes pay into an overseas bank account today and then let the cash earn some interest so that they can pay off the invoice in the future.75中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Chapter summary Section Topic 1 Inventory Summary The economic order quantity model attempts to manage inventory costs. This model ignores the hidden costs of stock. JIT suggests that inventory should be driven down to as close to zero as possible. Receivables Requires a 4 step approach: (a) A receivables policy (b) A credit analysis system (c) A credit control system (d) A debt collection system Payables Effective payables management involves controlling the timing of the payment of invoices to exploit attractive early payment discounts, and the credit period
but ensuring that invoices are not paid so late as to endanger long-term supplier relationships.2376中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Answer to lecture examples Answer to lecture examples 1 a. Calculate EOQ using formula 2 × 1,800 × 32
= ? = 160 units 4.5 b. Total cost = Purchasing cost + Ch x Q/2 + Co x D/Q = 1,800 x 25 + 4.5 x 160/2 + 32 x
= 45,720 Answer to lecture examples 2 Co= 200 D = 10,000 x 12 = 120,000 Ch = (10 x 15%) + 2 = 3.5 2 × 200 × 120,000 = 3,703 units
= ? 3.5 Answer to lecture examples 3 Step 1 Calculate EOQ ignoring discount 2 × 300 × 125
= ? = 50 units 30 Step 2 Calculate annual costs using EOQ, and at the lower boundary of each discount above the EOQ Q Order Cost D/Q x C 50 60 90 750 625 417 Holding Cost Q/2 x H 750 900 1,350 Purchase Cost DxP 25,000 24,250 23,750 Total ? 26,500 25,775 25,51777Ordering 90 units a time have the lowest inventory cost.中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Answer to lecture examples 4 Step 1 Calculate EOQ (already qualify for 1% discount condition) 2 × 1,800 × 32
= ? = 160 units 4.5Step 2 Calculate annual costs using EOQ, and at the lower boundary of each discount above the EOQ Q Order Cost D/Q x C 160 300 800 360 192 72 Holding Cost Q/2 x H 360 675 1,800 Purchase Cost DxP 44,550 44,100 43,200 Total ? 45,270 44,967 45,072Ordering 300 units a time have the lowest inventory cost.Answer to lecture example5 Average usage per week = 310,000 units / 50 weeks = 6,200 units Average lead time = 2 weeks Re-order level = 15,000 units Buffer safety inventory = inventory level C (average usage x average lead time) = 15,000 C (6,200 x 2 ) = 2,600 units Average inventory = buffer safety inventory + re-order amount / 2 = 2,600 + 50,000/2 = 27,600 units Answer to lecture example 6 Cost Finance cost of new receivables = (600,000 x 1.15 x 3/12) C (600,000 x 2/12) x 10%= (7,250) Benefit Additional contribution = ?600,000 × 15% × 20%= ?18,00078中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// A net benefit of?10,750 So, the change is favourable. Solution to lecture example 7 The change in credit policy is justifiable if the rate of return on the additional investment in working capital would exceed 20%. Extra profit Contribution/sales ratio 15% Increase in sales revenue $600,000 Increase in contribution and profit $600,000 a) Extra investment, if all accounts receivable take two months credit $ Average accounts receivable after the sales increase (2/12 × $3,000,000) 500,000 Less current average accounts receivable (1/12 × $2,400,000) (200,000) Increase in accounts receivable 300,000 Increase in inventories 100,000 400,000 (20,000) Less increase in accounts payable Net increase in working capital investment 380,000 Return on extra investment$90,000 = 23.7% $380,000b) Extra investment, if only the new accounts receivable take two months credit $ 100,000 100,000 200,000 (20,000) 180,000Increase in accounts receivable (2/12 of $600,000) Increase in inventories Less increase in accounts payable Net increase in working capital investment Return on extra investment$90,000 = 50% $180,000In both case (a) and case (b) the new credit policy appears to be worthwhile.79中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Solution to lecture example 8 Our approach is to calculate a) The profits forgone by offering the discount b) The interest charges saved or incurred as a result of the changes in the cash flows of the company Thus: a) The volume of accounts receivable, if the company policy remains unchanged, would be:3/12×$12,000,000=$3,000,000 b) If the policy is changed the volume if accounts receivable would be: = (10/365×50%×$12,000,000)+(2/12×50%×$12,000,000) =$164,384+$1,000,000 =$1,164,384 c) There will be a reduction in accounts receivable of $1,835,616. d) Since the company can invest at 20% a year, the value of a reduction in accounts receivable (a source of funds) is 20% of $1,835,616 each year in perpetuity, that is, $367,123 a year. e) Summary $ Value of reduction in accounts receivable each year 367,123 Less discounts allowed each year (2%×50%×12,000,000) (120,000) Net benefit of new discount policy each year 247,123 An extension of the payment period allowed to accounts receivable may be introduced in order to increase sales volume.Solution to example 9 The increase in profit before the cost of additional finance for Option A can be found as follows. (a) $ Increase in contribution from additional sales 25%×$1,800,000×40% Less increase in bad debts (3%×$2,250,000)-$18,000 Increase in annual profit *The C/S ratio is 100%-(75%×80%)=40%80180,000 (49,500) 130,500中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// (b) $ Proposed investment in accounts receivable $2,250,000×1/6 Less: current investment in accounts receivable $1,800,000×1/12 Additional investment required Cost of additional finance at 20% 375,000 (150,000) 225,000 45,000(c) As the increase in profit exceeds the cost of additional finance, Option A should be adopted. Solution to lecture example 10 It is assumed that factor would advance an amount equal to 80% of the invoiced debts, and the balance 30 days later. (a) The current situation is as follows, using the company's debt collection staff and a bank overdraft to finance all debts. $1,500,000 Credit sales Average credit period 7,500 The annual cost is as follows: 45/365×$1,500,000×13.5%(11%+2.5%) 24,966 Bad debts 0.5%×$1,500,000 7,500 Administration costs 30,000 Total costs 62,466 (b) The cost of the factor. 80% of credit sales financed by the factor would be 80% of $1,500,000=$1,200,000. For a consistent comparison, we must assume that 20% of credit sales would be financed by a bank overdraft. The average credit period would by only 30 days. The annual cost would be as follows. $ Factor's finance 30/365×$1,200,000×14% 13,808 Overdraft 30/365×$300,000×13.5% 3,329 17,137 Cost of factor's services: 2.5%×$1,500,000 37,500 Cost of the factor 54,637 (c) Conclusion. In this case, the factor's fees exactly equal the savings in bad debts ($7,500) and administration costs ($30,000). The factor is then cheaper overall because81中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// it will be more efficient at collecting debts. The advance of 80% of debts is not needed, however, it the company has sufficient overdraft facility because the factor's finance charge of 14% is higher than the company's overdraft rate of 13.5%. Answer to lecture example 11 ? Cost of debt factor (?m) Factors charge $480m ×5% ÷ 2 (the exchange rate) = ?12 m ? Benefit of the debt factor (i) Financing costs Current receivables = (480 x 3/12) / 2 = 60m New receivables = (480 x 2/12) / 2 = 40m Reduction of ?20m leads to interest saved of ?2m (ii) Bad debts = ($480 × 2%) / 2 = 4.8 (iii) Admin = 8m ∴ U se t he f act or as i ti s est i m at ed t o save ?2. 8m p. a. Answer to lecture example 12 ? Cost Current payables = 30/365 x 1,000,000 = ?82,192 New payables = 10/365 x 1,000,000 = ?27,397 Reduction of ?54795 x 0.1 = ?5,480 ? Benefit 0.025 x ?1,000,000 = ?25,000 Saving = ?19520 (Nb this is an approximate calculation, acceptable for exam purposes C many other approaches are possible) The discount should be accepted82中国上海市东体育会路 390 号 招生办：021- 教务处：021- 官方认可黄金级培训机构，数千学员一致选择 http:// Solution to lecture example 13 Suppose that X Co can invest cash to obtain an annual return of 25%, and that there is an invoice from the supplier for $1,000. The two alternatives are as follows. Refuse Accept Discount Discount $ $ Payment to supplier 1,000.0 980 Return from investing $980 between day 10 and day 45 $980×35/365×25% 23.5 Net cost 976.5 980 It is cheaper to refuse the discount because the investment rate of return on cash retained, in this example, exceeds the saving from the discount. Although a company may delay payment beyond the final due date, thereby obtaining even longer credit from its suppliers, such a policy would generally be inadvisable. Unacceptable delays in payment will worsen the company's credit rating, and additional credit may become difficult to obtain.83中国上海市东体育会路 390 号 招生办：021- 教务处：021-
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