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A sole proprietorship:
A sole proprietorship is a business owned by a single
individual who maintains complete title to the assets, but who is
also personally liable for all indebtedness i ncurred.
The sole proprietor maintains title to the firm's assets, has
unlimited liability, is entitled to the profits from the business, but
must also absorb any losses realized. This form of business is
easily initiated. Termination of the business comes by the owner
discontinuing the business or upon his death.
A partnership:
A partnership is an association of two or more individuals
coming together as co -owners for the purpose of operating a
business for profits. The partnership is equivalent to the sole
proprietorship, except that the partnership has multiple owners.
In a partnership, all general partners have unlimited
liability. Each partner is liable for the actions of the other
partners.
The partnership agreement dictates the basic
A corporation:
A corporation is a legal entity functioning separate and
apart from its owners. It can individually sue and be sued,
purchase, sell, or own property, and be subject to criminal
punishment for crimes.
The corporation is legally separate from its owners.
Ownership of the corporation is determined by the number of
shares of common stock owned by an individual. Since the
shares are transferable, the ownership in a corporation may be
easily transferred. Investors' liability is limited to the amount of
their investment. The life of the corporation is not dependent
upon the status of the investors. The death or withdrawal of an
investor does not disrupt the corporate life. However, the cost of
forming a corporation is more expensive than a proprietorship or
partnership.
Corporation
Sole Proprietorship
Partnership
Private
Public
Member
01
02-20
20-50
3-unlimited
Life
limited
limited
unlimited
Resources
limited
limited
unlimited
obligation
unlimited
unlimited
limited
Legal
No Legal
No Legal
Legal Body
Status
Body
Body
Chapter # 2,
Understanding Financial Statem ent, Taxes & Clash Flow
$ 12,800
($ 5,750)
$ 7,050
($ 1,350)
($ 850)
($ 500)
($ 2,700)
$ 4,350
($ 900)
$ 3,450
($ 1,440)
$ 2,010
Belmond Inc.
Balance Sheet
On December 31, 2003
Assets
C.A:
Cash
Account Receivable
Inventory
Total (C.A)
F.A:
Building & Equipment
Acc. Depreciation
Total(F.A)
$ 16,550
$ 9,600
$ 6,500
$ 32,650
$ 122,000
($ 34,000)
$ 88,000
Total(CA + F.A)
$ 120,650
$ 55,000
$ 60,400
Shareholder Equity:
Common Stock,
Retain earning (?)
$ 45,000
$ 15,250
Total(CL + Equity)
$ 120,650
$ 800,000
($ 500,000)
$ 300,000
($ 280,000)
$ 20,000
$ 96,000
$ 120,000
$ 110,000
$ 326,000
Total(CA + F.A)
Common Stock,
Retain Earning Prior year (?)
Retain Earning Current year (?)
Shareholder Equity:
$ 160,000
$ 350,000
$ 320,000
$ 100,000
$ 20,000
$ 790,000
$ 320,000
$ 100,000
$ 20,000
$ 440,000
($ 400,000)
($ 100,000)
$ 4,000,000
($ 2,000,000)
$ 2,000,000
($ 500,000)
$ 1,500,000
($ 150,000)
$ 1,350,000
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 1,350,000 $ 1,015,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 345,100
$ 459,000
$ 1,350,000
($ 459,000)
$ 891,000
($ 25,000)
$ 866,000
$ 6,000,000
($ 3,000,000)
$ 3,000,000
($ 2,600,000)
$ 400,000
($ 30,000)
$ 370,000
($ 125,800)
$ 244,200
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 370,000
$ 35,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 11,900
$ 125,800
($ 50,000)
$ 00
$ 150,000
Increase / Decrease
in Long term Debts
$ 00
Increase in Stocks
Finance Free Cash
Flow
$ 00
$ 10,000
($ 50,000)
Payment of Interest
($ 10,000)
Payment of Dividend
($ 31,800)
Increase/Decrease in
Note Payable
($ 2,000)
Increase / Decrease
in Long term Debts
($ 10,000)
A/C Receivable
Inventory
Prepaid Rent
($ 9,000)
$ 33,000
Increase in Stocks
Finance Free Cash Flow
($ 100)
Market able Securities $ 200
Change In Current Asset ($ 23,100)
C.L
A/C payable
$ 9,000
Accruals
($ 1,000)
$ 8,000
3. Change In Fixed Asset
Plant & equipment
($ 14,000)
Free Cash Flow from Asset Prospective $ 53,800
$ 00
($ 53,800)
$ 6,000
($ 12,000)
$ 00
Payment of Interest
($ 4,000)
$ 00
$120,000
$ 14,000
$ 573,000
($ 297,000)
$ 276,000
($ 79,000)
($ 66,000)
($ 145,000)
$ 131,000
($ 4,750)
$ 126,250
($ 50,500)
$ 75,750
Warner Company.
Balance Sheet
On December 31, 2003
Assets
C.A:
Cash
$ 225,000
Account Receivable
$ 153,000
Inventory
$ 99,300
Prepaid Expense
$ 14,500
Total (C.A)
$ 491,800
F.A:
Building & Equipment $ 895,000
Acc. Depreciation
($ 263,000) Shareholder Equity:
Total(F.A)
$ 632,000
Common Stock,
Retain earning (?)
Total(CA + F.A)
$ 289,000
$ 262,900
$ 1,123,800
10
$ 900,000
($ 550,000)
$ 350,000
($ 280,000)
$ 70,000
$ 90,000
$ 150,000
$ 110,000
$ 350,000
Total(CA + F.A)
Common Stock,
Retain Earning Prior year (?)
Retain Earning Current year (?)
Shareholder Equity:
$ 160,000
$ 340,000
$ 320,000
$ 84,000
$ 70,000
$ 814,000
$ 320,000
$ 84,000
$ 70,000
$ 474,000
11
($ 500,000)
($ 100,000)
$ 3,500,000
($ 2,000,000)
$ 1,500,000
($ 600,000)
$ 900,000
($ 165,000)
$ 735,000
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 735,000
$ 400,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 136,000
$ 249,900
$ 735,000
($ 249,900)
$ 485,100
($ 25,000)
$ 460,100
12
$ 7,000,000
($ 4,000,000)
$ 3,000,000
($ 2,600,000)
$ 400,000
($ 40,000)
$ 360,000
($122,400)
$ 237,600
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 360,000
$ 25,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 8,500
$ 122,400
13
$ 20,000
$ 115,000
Increase / Decrease
in Long term Debts
$ 00
Increase in Stocks
$ 00
($ 7,000)
($ 135,000) ($ 135,000)
14
($ 4,000)
$ 43,000
$ 200
($ 100)
($ 3,000)
$ 00
($ 54,800)
15
Payment of Interest
($ 5,000)
$ 00
$70,000
($35,000)
16
Chapter # 3,
Evaluating a Firm s Financial Perform ance
Formulas:
1
Current Ratio
Current Asset
Current Liabilities
Debt ratio
Average Collection
Period
Inventory Turnover
=
=
=
=
10
11
Return On equity
=
=
17
$ 201,875
$ 175,000
$ 223,125
$ 600,000
$ 1,500,000
$ 2,100,000 Total(CL + Equity)
$ 2,100,000
1 Debt ratio
Total Debt
Total Debt
Total Debt
=
=
=
=
Total Debt
Total Asset
Total Asset Debt ratio
$ 2,100,000 20%
$ 420,000
=
=
=
=
Sales
Total Asset
Total turnover Total Asset
$ 2,100,000 1
$ 2,100,000
15%
Then,
CGS will be 85 % of Total Sale = $ 2,100,000 85% = $ 1,785,000
Cost of goods sold
inventory Turnover =
AV. Inventory
Cost of goods sold
=
AV. Inventory
inventory Turnover
$ 1,785,000
=
AV. Inventory
8
AV. Inventory
$ 223,125
=
Recommended Text Book: Financial Management; Principles and Applications:
10th Edition, By Arthur J. Keown, lohn D. Martin & J. William petty
Prepared by : E-mail: irfan.gujjar@yahoo.com ,
Cell # : 0334-7481122
18
Average Collection
Period
Av. Receivable
Av. Receivable
Av. Receivable
Current Asset
Current Liabilities
2.5
Current Ratio
2.5
Current Liabilities
2.5
Current Liabilities
2.5
Current Ratio
1
million
2.5
2.5
Suppose X is the required short term Finance
1
million
Current Ratio
Current Liabilities
Current Ratio
Current Asset
Current Liabilities
Current Asset + X
Current Liabilities + X
2.5 + X
1+X
2.5 + X = 2 + 2 X
=
=
X = 0.5
3 1.5
3 1.5
19
Current Ratio
Debt ratio
Current Asset
Current Liabilities
$ 3,500
$ 2,000
Total Debt
Total Asset
C.L + L.L
$ 8,000
$ 2,000 + $ 2,000
$ 8,000
EBIT
Interest Expense
$ 1,700
$ 367
Av. Receivable 360
credit sale
$ 2,000 360
$ 8,000
Cost of goods sold
AV. Inventory
$ 3,300
$ 1,000
Sales
Fixed Asset
$ 8,000
$ 4,500
Sales
Total Asset
$ 8,000
$ 8,000
Gross Profit
Sales
$ 4,700
$ 8,000
Operating Profit (EBIT)
Sales
$ 1,700
$ 8,000
Net Income
Equity
$ 800
$ 4,000
=
=
Time interest
earned
=
=
=
Average
Collection Period
=
=
Inventory
Turnover
=
=
Fixed Asset
Turnover
Total Asset
turnover
=
=
Gross profit
margin
=
=
=
10
Operating Profit
Margin
Return On equity
=
=
=
$ 1 . 75
0.5, (50%)
$ 4 . 63
90 Days
3.3 T imes
1.778
0.58, (58%)
0.2125 %
0.2, (20%)
20
11
Net Income
Sale
$ 800
$ 8,000
0.1
A:
Total Asset Turnover
Sales
Total Asset
$ 10
$5
$2
million
B:
Total Asset Turnover
$ 3.5
Sales
Total Asset
Sales
$5
Sales
=
=
$ 3.5 $ 5
$ 17.5
$ 17.5
($ 10)
$ 7.5
75%
C:
Return On Investment
Operating profit m argin :
Last year operating profit margin=10%
Total Asset Turnover = 2
Current Year Total Asset Turnover = 3 . 5
Last Year
Current Year
0.1 2 = 0.2
0 . 1 3 . 5 = 0. 35
20 %
35 %
21
30% of Sale
9 million
75% of total sale
1.5 million
$ 300,000
$ 100,000
A:
Average Collection
Average Collection
Period
Credit sale
9,000,000 75%
6,750,000
Average Collection
Period
562,500 360
6,750,000
30 days
Average Collection
Period
Av. Receivable
375,000
700,000
B:
C:
Inventory Turnover
AV. Inventory
AV. Inventory
30% of Sale
70%of Sale
9,000,000 70% = 6,300,000
22
$ 173,250
$ 81,250
$ 45,500
$ 300,000
$ 1,000,000
$ 1,300,000 Total(CL + Equity)
$ 1,300,000
1 Debt ratio
Total Debt
Total Debt
Total Debt
=
=
=
=
Total Debt
Total Asset
Total Asset Debt ratio
$ 1,300,000 30%
$ 390,000
=
=
=
=
Sales
Total Asset
Total Asset Total Asset turnover
$ 1,300,000 0.5
$ 650,000
23
Average Collection
Period
Av. Receivable
Av. Receivable
Av. Receivable
Current Ratio
Current Ratio
Current Asset
Current Liabilities
3
Current Liabilities
2.75
3
2.75
Suppose X is the required short term Finance
Current Ratio
1.09
million
Current Liabilities
Current Asset
Current Liabilities
Current Asset + X
Current Liabilities + X
3+X
1.09 + X
3 + X = 2.18 + 2 X
X = 0 .81
=
=
3 . 81 1 . 9
3 . 81 1 .9
24
Current Ratio
Debt ratio
Current Asset
Current Liabilities
$ 3,500
$ 1,800
Total Debt
Total Asset
C.L + L.L
$ 8,000
$ 1,800 + $ 2,100
$ 8,000
EBIT
Interest Expense
$ 1,500
$ 367
Av. Receivable 360
credit sale
$ 1,500 360
$ 7,500
Cost of goods sold
AV. Inventory
$ 3,000
$ 1,000
Sales
Fixed Asset
$ 7,500
$ 4,500
Sales
Total Asset
$ 7,500
$ 8,000
Gross Profit
Sales
$ 4,500
$ 7,500
Operating Profit (EBIT)
Sales
$ 1,500
$ 7,500
Net Income
Equity
$ 6,80
$ 4,100
=
=
Time interest
earned
=
=
=
Average
Collection Period
=
=
Inventory
Turnover
=
=
Fixed Asset
Turnover
Total Asset
turnover
=
=
Gross profit
margin
=
=
=
10
Operating Profit
Margin
Return On equity
=
=
=
$ 1 . 94
0.48, (48%)
$ 4 . 08
72 Days
3 T imes
1.667
0.937
0.6, (60%)
0.2 %
0.16, (16%)
25
11
Net Income
Sale
$ 800
$ 8,000
0.1
A:
Total Asset
Turnover
Total Asset
Turnover
Total Asset
Turnover
Total Target
Turnover
Sales
Sales
Total Asset
$ 11
$6
1.83
million
2.5
million
$ 15
million
B:
=
Sales
Total Asset
Sales
$6
$ 2.5 $ 6
$ 15 million
($ 11) million
$4
36.3%
C:
Return On Investment
Operating profit m argin :
Last year operating profit margin= 6%
Total Asset Turnover = 1.83
Current Year Total Asset Turnover = 3 . 5
Last Year
Current Year
0 . 6 0 . 1098 = 0 .183
0 . 6 2 . 5 = 0. 15
10 . 98 %
15 %
26
25% of Sale
9.75 million
75% of total sale
1.550,000
$ 300,000
$ 150,000
A:
Average Collection
Average Collection
Period
Credit sale
9,750,000 75%
7,312,500
Average Collection
Period
562,500 360
7,312,500
28 days
Average Collection
Period
Av. Receivable
406,250
914,062 . 5
B:
C:
Inventory Turnover
AV. Inventory
AV. Inventory
25% of Sale
75%of Sale
9,750,000 75% = 7,312,500
27
CH#4
(Financial Forecasting Planning and Budgeting)
Sales
Net Income
% of Sales
2004
15,000,000
2,000,000
Balance Sheet,2003
Current Assets
Net fixed Assets
Total Assets
3,000,000
6,000,000
9,000,000
% of
Sales
25%
50%
Balance Sheet,2004
3,750,000
7,500,000
11,250,000
3,000,000
2,000,000
5,000,000
25%
NA
3,750,000
2,000,000
5,750,000
Common stock
Paid-in capital
Retained Earnings
Total Equity
1,000,000
1,800,000
1,200,000
4,000,000
NA
NA
1,000,000
1,800,000
3,200,000
6,000,000
9,000,000
11,750,000
28
(A)
Cash Collection Schedule in April
Sale
Jan. 15,000
Feb. 20,000
March 30,000
April 40,000
Jan
7,500
-
(Amount In $)
Feb
March April
May
June
3,750
3,750
10,000 5,000
5,000
15,000 7,500 7,500
20,000 10,000 10,000
Total 32,500 17,500 10,000
Total(May + June)
27,500
(B)
Collections From:
April cash sales
February credit sales
March credit sales
Total
$ 20,000
$ 5,000
$ 7,500
$ 32,500
29
Assets
Current Asset
Fixed Asset
Total
$ 800,000
$ 1,000,000
$ 1,800,000
$ 400,000
$ 800,000
$ 100,000
$ 500,000
$ 1,800,000
Earning = $ 200,000 2
Retain Earning = $ 100,000
30
Account Payable
Long Term Debt
Total Debt
1.5 million
2 million
3.5 million
Account Payable
Long Term Debt
Total Debt
2 million
2 million
4 million
Common Equity
Retain earning
Total
Total Debt + Capital
2.5 million
4.0 million
6.5 million
10 million
Common Equity
Retain earning
Total
Total Debt + Capital
2.5 million
4.5 million
07 million
11 million
11.7667 million
(11 million)
0.7667 million
31
Sales
Net Income
% of Sales
2004
25,000,000
2,000,000
Current Assets
Net fixed Assets
Total Assets
4,000,000
8,000,000
12,000,000
% of
Sales
20%
40%
Balance Sheet,2004
5,000,000
10,000,000
15,000,000
3,000,000
2,000,000
5,000,000
15%
NA
3,750,000
2,000,000
5,750,000
Common stock
Paid-in capital
Retained Earnings
Total Equity
1,000,000
1,800,000
4,200,000
7,000,000
NA
NA
1,000,000
1,800,000
6,200,000
9,000,000
12,000,000
14,750,000
32
(A)
Cash Collection Schedule in April
(Amount In $)
Sale
Jan
Feb
March April
Jan. 100,000 50,000 25,000 25,000
Feb. 100,000
50,000 25,000 25,000
March 80,000
40,000 20,000
April 60,000
30,000
Total 75,000
Total(May + June)
May
-
June
-
20,000
15,000 15,000
35,000 15,000
50,000
(B)
Collections From:
April cash sales
February credit sales
March credit sales
Total
$ 30,000
$ 25,000
$ 20,000
$ 75,000
33
Assets
Current Asset
Fixed Asset
Total
$ 750,000
$ 1,000,000
$ 1,750,000
$ 550,000
$ 700,000
$ 150,000
$ 350,000
$ 1,750,000
34
Carson Enterprises,
DFC For the Coming Year
Based 18 million Future Status
Based 25 million
7 million
C.A
9.7222 million
6 million
F.A
6.1000 million
13 million
Total
15.8222 million
C.A based on 20 million = (7 18 25 = 6.667)
(B)
Account Payable
1.5 million
2 million
3.5 million
Common Equity
Retain earning
Total
Total Debt+Capital
5.5 million
4.0 million
9.5 million
13 million
Account Payable
(1.51825)
Long Term Debt
Total Debt
2.08 million
2 million
4.08 million
Common Equity
5.5 million
Retain earning
4.650 million
Total
10.15 million
Total Debt+Capital 14.23 million
15.8222 million
(14.233 million)
1.5922 million
35
Chapter # 9,
(Capital Budgeting Decision Criteria)
(A)
An Initial outlay
Single Free Cash flow
Period
PV
$ 10,000
$ 10,000
$ 17,182
08 years
FV (PVIF)
n=8
$ 17,182 (PVIF)
n=8
(PVIF)
$ 10,000 $ 17,182
n=8
(PVIF)
$ 0.5820
(see appendix C page A-13 in the column of "n" year 8)
u will find 0.5820 at 7%
internal Rate of return
= 7%
=
=
=
=
=
=
=
(B)
An Initial outlay
= $ 10,000
Single Free Cash flow
= $ 48,077
Period
= 10 years
PV
= FV (PVIF)
$ 10,000
= $ 48,077 (PVIF)n=10
$ 10,000 $ 48,077
= (PVIF)n=10
$ 0.2078
= (PVIF)n=10
(see appendix C page A-13 in the column of "n" year 10)
u will find 0.2078 at 17%
internal Rate of return
= 17%
36
(c)
An Initial outlay
= $ 10,000
Single Free Cash flow
= $ 114,943
Period
= 20 years
PV
= FV (PVIF)
$ 10,000
= $ 114,943 (PVIF)n=20
$ 10,000 $ 114,943
= (PVIF)n=20
$ 0.08699
= (PVIF)n=20
(see appendix C page A-13 in the column of "n" year 20)
u will find 0.08699 at 13 %
internal Rate of return
= 13 %
(D)
An Initial outlay
= $ 10,000
Single Free Cash flow
= $ 13,680
Period
= 03 years
PV
= FV (PVIF)
$ 10,000
= $ 13,680 (PVIF)n=03
$ 10,000 $ 13,680
= (PVIF)n=03
$ 0.730
= (PVIF)n=03
(see appendix C page A-13 in the column of "n" years 3)
u will find 0.730 at 11%
internal Rate of return
= 11%
37
(A)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 1,993
of each year
Period
= 10 years
PV
= FV (PVIF)
$ 10,000
= $ 1,993 (PVIF)n=10
n=10
$ 10,000 $ 1,993
= (PVIF)
n=10
$ 5.018
= (PVIF)
(see appendix C page A-17 in the column of "n" year 10)
u will find $ 5.018 at 15 %
internal Rate of return
= 15 %
(B)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 2,054
of each year
Period
= 20 years
PV
= FV (PVIF)
$ 10,000
= $ 114,943 (PVIF)n=20
$ 10,000 $ 2,054
= (PVIF)n=20
$ 4.87
= (PVIF)n=20
(see appendix E page A-17 in the column of "n" year 20)
u will find 4.87 at 20%
internal Rate of return
= 20 %
38
(c)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 1,193
of each year
Period
= 12 years
PV
= FV (PVIF)
$ 10,000
= $ 1,193 (PVIF)n=12
$ 10,000 $ 1,193
= (PVIF)n=12
$ 8.382
= (PVIF)n=12
(see appendix E page A-17 in the column of "n" years 12)
u will find $ 8.382 at 6 %
internal Rate of return
= 6%
(D)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 2,843
of each year
Period
= 05 years
PV
= FV (PVIF)
$ 10,000
= $ 2,843 (PVIF)n=05
$ 10,000 $ 2,843
= (PVIF)n=05
3.517
= (PVIF)n=05
(see appendix E page A-17 in the column of "n" year 05)
u will find $ 3.517 at 13%
internal Rate of return
= 13%
39
Cash Flow
2,000
5,000
8,000
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
1,801
4,058
5,849
11,708
Cash Flow
2,000
5,000
8,000
21% D.F
0.826 =
0.683 =
0.564 =
Present Value
1,652
3,415
4,515
9,582
IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 1708 (11,708-9,582)
11 + 1708 2,126 (10)
11 + 0.803 (10)
11 + 8.03
19.03 %
40
(B)
Year
1
2
3
Cash Flow
8,000
5,000
2,000
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
7,207
4,058
1,462
12,727
Cash Flow
8,000
5,000
2,000
35% D.F
0.74
=
0.548 =
0.406 =
Present Value
5,920
2,740
813
9,473
=
=
=
=
=
41
(C)
Year
1
2
3
4
5
6
Cash Flow
2,000
2,000
2,000
2,000
2,000
5,000
11% D.F
0.9009
0.8116
0.7311
0.6587
0.5934
0.5346
=
=
=
=
=
=
Present Value
8,108.8
1,623.2
1,462
1,317.4
1,186.8
2,673
10,064
Cash Flow
2,000
2,000
2,000
2,000
2,000
5,000
10,064- 10,000 = 64
21% D.F
0.826
0.683
0.5644
0.4665
0.3855
0.3186
=
=
=
=
=
=
Present Value
1,652
1,366
1,128.8
933
771
1,593
7,443
=
=
=
=
=
11 + 64 (10,064- 7,443)
11 + 64 2,621 (10)
11 + 0.0244 (10)
11 + 2.441
11.244 %
42
1,950,000
450,000
9%
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
(D)
Yes, the project should be accepted
43
80,000
20,000
10 %
Duration
01 Years
02 Years
03 Years
04 Years
Payback
20,000
20,000
20,000
20,000
Accumulated
20,000
40,000
60,000
80,000
4,200
44
=
=
=
=
=
=
=
=
Note **: See appendix E Page A-17 in the column 10% of N years 6
You will find = 4.355
Profitability Index:
Profitability Index
Profitability Index
Profitability Index
Internal Rate of Return
For IRR
20 %
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=
Note **: See appendix E Page A-17 in the column 20% of N years 6
You will find = 3.3255 or 3.326
45
=
=
=
=
=
=
=
=
Note **: See appendix E Page A-17 in the column 12% of N years 6
You will find = 4.111
Profitability Index:
Profitability Index
Profitability Index
Profitability Index
Internal Rate of Return
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=
We will take 2 %
n=6
(1 0.02 - 1 0.02 (1.2) ) = 5.601
12,000 (5.601) = 67,217
10
2 + 17,217 (49,337 - 67,217)
2 + 17,217 17,880 (10)
2 + 9.629
11.629
46
Project (B)
Net present value:
NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=
Note **: See appendix E Page A-17 in the column 12% of N years 6
You will find = 4.111
Profitability Index:
Profitability Index
Profitability Index
Profitability Index
Internal Rate of Return
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=
47
(a)
An Initial outlay
= $ 10,000
Single Free Cash flow
= $ 19,926
Period
= 08 years
PV
= FV (PVIF)
$ 10,000
= $ 19,926 (PVIF)n=8
= (PVIF)n=8
$ 10,000 $ 19,926
= (PVIF)n=8
$ 0.501
(see appendix C page A-13 in the column of "n" year 8)
u will find 0.501 at 9%
internal Rate of return
= 9%
(B)
An Initial outlay
= $ 10,000
Single Free Cash flow
= $ 20,122
Period
= 12 years
PV
= FV (PVIF)
$ 10,000
= $ 20,122 (PVIF)n=12
$ 10,000 $ 20,122
= (PVIF)n=12
$ 0.4969
= (PVIF)n=12
(see appendix C page A-13 in the column of "n" year 12)
u will find 0.4969at 6%
internal Rate of return
= 6%
48
(c)
An Initial outlay
= $ 10,000
Single Free Cash flow
= $ 121,000
Period
= 22 years
PV
= FV (PVIF)
$ 10,000
= $ 121,000 (PVIF)n=22
$ 10,000 $ 121,000
= (PVIF)n=22
$ 0.0826
= (PVIF)n=22
(see appendix C page A-13 in the column of "n" year 22)
u will find 0.0826 at 12 %
internal Rate of return
= 12 %
(D)
An Initial outlay
= $ 10,000
Single Free Cash flow
= $ 19,254
Period
= 05 years
PV
= FV (PVIF)
$ 10,000
= $ 19,254 (PVIF)n=05
$ 10,000 $ 19,254
= (PVIF)n=05
$ 0.5193
= (PVIF)n=05
(see appendix C page A-13 in the column of "n" years 5)
u will find 0.5193 at 14%
internal Rate of return
= 14%
49
(A)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 2,146
of each year
Period
= 10 years
PV
= FV (PVIF)
$ 10,000
= $ 2,146 (PVIF)n=10
n=10
$ 10,000 $ 2,146
= (PVIF)
n=10
$ 4.6598
= (PVIF)
(see appendix E page A-17 in the column of "n" year 10)
u will find 4.6598 at 17 %
internal Rate of return
= 17 %
(B)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 1,960
of each year
Period
= 20 years
PV
= FV (PVIF)
$ 10,000
= $ 1,960 (PVIF)n=20
$ 10,000 $ 1,960
= (PVIF)n=20
$ 5.102
= (PVIF)n=20
(see appendix E page A-17 in the column of "n" year 20)
u will find 5.102 at 19%
internal Rate of return
= 19 %
50
(c)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 1,396
of each year
Period
= 12 years
PV
= FV (PVIF)
$ 10,000
= $ 1,396 (PVIF)n=12
$ 10,000 $ 1,396
= (PVIF)n=12
$ 7.1633
= (PVIF)n=12
(see appendix E page A-17 in the column of "n" years 12)
u will find 7.1633 at 9 %
internal Rate of return
= 9%
(D)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 3,197
of each year
Period
= 05 years
PV
= FV (PVIF)
$ 10,000
= $ 3,197 (PVIF)n=05
$ 10,000 $ 3,197
= (PVIF)n=05
3.1279
= (PVIF)n=05
(see appendix E page A-17 in the column of "n" year 05)
u will find 3.1279 at 18%
internal Rate of return
= 18%
51
Cash Flow
3,000
5,000
7,500
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
2,702.7
4,058
5,482.5
12,243
Cash Flow
3,000
5,000
7,500
21% D.F
0.826 =
0.683 =
0.564 =
Present Value
2,478
3,415
4,230
10,123
IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 2,243(12,243-10,123)
11 + 2,243 2,120 (10)
11 + 1.058 (10)
11 + 10.58
21.58 %
52
(B)
Year
1
2
3
Cash Flow
9,000
6,000
2,000
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
8,108
4,869
1,462
14,439
Cash Flow
9,000
6,000
2,000
35% D.F
0.74
=
0.548 =
0.406 =
Present Value
6,660
3,288
812
10,760
=
=
=
=
=
53
(C)
Year
1
2
3
4
5
6
Cash Flow
2,000
2,000
2,000
2,000
2,000
2,000
11% D.F
0.9009
0.8116
0.7311
0.6587
0.5934
0.5346
=
=
=
=
=
=
Present Value
8,108.8
1,623.2
1,462
1,317.4
1,186.8
2,673
10,064
Cash Flow
2,000
2,000
2,000
2,000
2,000
2,000
21% D.F
0.826
0.683
0.5644
0.4665
0.3855
0.3186
=
=
=
=
=
=
Present Value
1,652
1,366
1,128.8
933
771
1,593
7,443
=
=
=
=
=
54
2,500,000
750,000
11 %
=
=
=
=
=
=
=
(D)
Yes, the project should be accepted
55
160,000
40,000
10 %
Payback
40,000
40,000
40,000
40,000
04 Years
Accumulated
40,000
80,000
120,000
160,000
8,400
56
=
=
=
=
=
=
=
=
Note **: See appendix E Page A-17 in the column 10% of N years 6
You will find = 4.355
Profitability Index:
Profitability Index
Profitability Index
Profitability Index
Internal Rate of Return
For IRR
20 %
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=
Note **: See appendix E Page A-17 in the column 20% of N years 6
You will find = 3.3255 or 3.326
57
=
=
=
=
=
=
=
=
Note **: See appendix E Page A-17 in the column 12% of N years 6
You will find = 4.111
Profitability Index:
Profitability Index
Profitability Index
Profitability Index
Internal Rate of Return
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=
58
Project (B)
Net present value:
NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=
Note **: See appendix C Page A-17 in the column 12% of N years 6
You will find = 4.111
Profitability Index:
Profitability Index
Profitability Index
Profitability Index
Internal Rate of Return
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=
6.033 %
59
Chapter # 10,
Cost
=
=
Depreciation(3,000 5 Year)
Book Value(Cost - Depreciation) =
=
Sale Price
=
Book Value
Gain (Sale - Book Value)
Taxes 34% of 20,000 (less)
30,000
(15,000)
15,000
35,000
(15,000)
20,000
(6,800)
13,200
(B)
If this M achine is sold on $25,000
Sale Price
Book Value
Gain (Sale - Book Value)
Taxes 34% of 10,000 (less)
=
25,000
= (15,000)
=
10,000
=
(3,400)
=
6,800
Taxes liabilities = 3,400
(C)
If this M achine is sold on $15,000
Sale Price
=
Book Value
=
=
Gain (Sale - Book Value)
No gain No Loss
=
Taxes liabilities = 00
15,000
(15,000)
00
00)
(D)
If this M achine is sold on $12,000
Sale Price
=
Book Value
=
=
Loss (Sale - Book Value)
Tax savings 34% of 3,000
=
Tax savings = 1,020
12,000
(15,000)
(3,000)
1,020
60
Account Receivable
Inventory
Account Payable
Without Project
45,000
65,000
70,000
=
=
=
=
=
=
=
475,000
(161,500)
313,500
100,000
413,500
(9,000)
404,500
(18,000)
(15,000)
24,000
(9,000)
61
Account Receivable
Inventory
Account Payable
Without Project
55,000
55,000
90,000
=
=
=
=
=
=
=
900,000
(306,000)
594,000
300,000
894,000
(7,000)
887,000
(8,000)
(15,000)
16,000
(7,000)
62
= 2,000,000
= (800,000)
= (200,000)
= 1,000,000
= (340,000)
= 660,000
= 1,000,000
= (340,000)
= 660,000
= 200,000
= 860,000
Three Alternatives
1. Add Back Depreciation
Earning after Tax
Add Depreciation
Free Cash Flow
=
=
660,000
200,000
860,000
2. Definition Approach
Change in Revenue
Change in Expense
Change in EB1T
Tax( 34% of 1,000,000)
Free Cash Flow
= 2,000,000
= (800,000)
= 1,200,000
= (340,000)
= 860,000
= 2,000,000
= (800,000)
= 1,200,000
= (408,000)
= 792,000
= 68,000
= 860,000
63
= 3,000,000
= (900,000)
= (400,000)
= 1,700,000
= (578,000)
= 1,122,000
B. Profoma Approach
Change in EB1T
Tax ( 34% of 1,700,000)
Change in Earning after Tax
Add Depreciation
Free Cash Flow
= 1,700,000
= (578,000)
= 1,122,000
= 400,000
= 1,522,000
Three Alternatives
1. Add Back Depreciation
Earning after Tax
Add Depreciation
Free Cash Flow
= 1,122,000
= 400,000
= 1,522,000
2. Definition Approach
Change in Revenue
Change in Expense
Change in EB1T
Tax( 34% of 1,700,000)
Free Cash Flow
= 3,000,000
= (900,000)
= 2,100,000
= (578,000)
= 1,522,000
= 3,000,000
= (900,000)
= 2,100,000
= (714,000)
= 1,386,000
= 136,000
= 1,522,000
64
=
=
=
=
1,000,000
(400,000)
(160,000)
(100,000)
= 340,000
= (115,600)
= 224,400
= 100,000
= 324,400
=
=
=
=
=
=
=
=
324,400
50,000
374,400
65
40,000
(20,000)
20,000
45,000
(20,000)
25,000
(8,500)
16,500
(B)
If this M achine is sold on $40,000
Sale Price
Book Value
Gain (Sale - Book Value)
Taxes 34% of 20,000 (less)
=
=
=
=
=
Taxes liabilities = 6,800
40,000
(20,000)
20,000
(6,800)
13,200
(C)
If this M achine is sold on $20,000
Sale Price
=
Book Value
=
=
Gain (Sale - Book Value)
No gain No Loss
=
Taxes liabilities = 00
20,000
(20,000)
00
00)
(D)
If this M achine is sold on $17,000
Sale Price
=
Book Value
=
=
Loss (Sale - Book Value)
Tax savings 34% of 3,000
=
Tax savings = 1,020
17,000
(20,000)
(3,000)
1,020
66
Account Receivable
Inventory
Account Payable
Without Project
55,000
100,000
70,000
=
=
=
=
=
=
=
775,000
(263,500)
511,500
200,000
711,500
(64,000)
647,500
(34,000)
(80,000)
50,000
(64,000)
67
Account Receivable
Inventory
Account Payable
Without Project
33,000
25,000
50,000
=
=
=
=
=
=
=
300,000
(102,000)
198,000
50,000
248,000
31,000
279,000
10,000
(15,000)
36,000
31,000
68
250,000
10,000
15,000
275,000
70,000
(23,800)
46,200
26,000
72,200
72,200
15,000
87,200
NPV
= PV of Cash in flow Less
PV of Cash out flow
PV Cash out flow = 275,000
15%,
9th
PV Cash in flow =
72,200 (FVIF)
n
+ 87,200 (FVIF)15%, n 10th
PV Cash in flow =
34,400 (4.772) + 87,200 (.247)
PV Cash in flow =
344,538.4 + 21,538.4
NPV = PV of Cash in flow
Less
PV of Cash out flow
NPV =
366,076.8
Less
275,000
NPV = 91,076.8
Yes, the NPV > 0.
Note :*(FVIF=1 0.15 -1
0.15(1.15)n=9)
= 4.772
69
=
=
=
=
1,000,000
50,000
100,000
150,000
= 1,300,000
EBIT =
Tax ( 34% of 400,000)
=
Earning After Tax
=
Add Depreciation(1050,000 10 years) =
Free Cash Flow (1-9 years )
=
C. Terminal cash Flow
Annual (1-9 years )Free Cash Flow =
Add Working Capital (Inventory)
=
Terminal Free Cash Flow (Year 10) =
D. NET PROJECT VALUE
400,000
(136,000)
264,000
105,000
369,000
369,000
150,000
519,000
NPV
= PV of Cash in flow Less PV of Cash out flow
PV Cash out flow = 1,300,000
12%,
9th
PV Cash in flow = 369,000 (FVIF)
n
+ 519,000 (FVIF)12%, n 10th
PV Cash in flow =
369,000 (5.328) + 519,000 (.322)
PV Cash in flow =
1,966,032 + 167,118
NPV = PV of Cash in flow
Less
PV of Cash out flow
NPV =
2,133,150
Less
1,300,000
NPV = 833,150
Yes, the NPV > 0.
Note :*(FVIF=1 0.12 -1 0.12(1.12)n=9) See appendix E Page A-17 in
the column 12% of N years 9
= 5.328
You will find = 5.328
See appendix C Page A-13 in
the column 12% of N years 10
You will find = 0. .322
70
=
=
=
=
100,000
5,000
5,000
25,000
135,000
EBIT =
Tax ( 34% of 25,000)
=
Earning After Tax
=
Add Depreciation(105,000 10 years) =
Free Cash Flow (1-9 years )
=
C. Terminal cash Flow
Annual (1-9 years )Free Cash Flow =
Add Working Capital (Inventory)
=
Terminal Free Cash Flow (Year 10) =
D. NET PROJECT VALUE
25,000
(8,500)
264,000
10,500
27,000
27,000
25,000
52,000
NPV
= PV of Cash in flow Less PV of Cash out flow
PV Cash out flow = 135,000
12%,
9th
PV Cash in flow = 27,000 (FVIF)
n
+ 52,000 (FVIF)12%, n 10th
PV Cash in flow =
27,000 (5.328) + 52,000 (.322)
PV Cash in flow =
143,856 + 16,744
NPV = PV of Cash in flow
Less
PV of Cash out flow
NPV =
160,600
Less
135,000
NPV = 25,600
Yes, the NPV > 0.
Note :*(FVIF=1 0.12 -1 0.12(1.12)n=9) See appendix E Page A-17 in
the column 12% of N years 9
= 5.328
You will find = 5.328
See appendix C Page A-13 in
the column 12% of N years 10
You will find = 0. .322
71
Chapter # 18,
(Working Capital Management & Short-Term Financing)
CA - CL
CA CL
CA - Inventory CL
Firm A
100,000
1.25
0.5
Firm B
100,000
0.83
0.33
= 59,999.85 = 60,000.00
(C) Opportunity Cost
Cost of Credit not taking Discount % Discount 100 % Discount 360
Credit term Discount Term
4,800 (480,000 4,800) 360 (45
15)
4,800 475,200 360 30
0.01010 12
Cost of Credit not taking Discount
0.1212 = 12.12%
72
= 3000 87,000
= 0.03448 (For 3 month)
73
74
1
m
(1+ I m) 1
= (1+ 0.3637 18) 18 1
= (1+ 0.02038) 18 1 = (1.02038) 18 1
= 1.4381 1 = 0.4381 = 43.81 %
360 20 = 18
1
m
(1+ I m) 1
= (1+ 0.7416 24) 24 1
= (1+ 0.03087) 24 1 = (1.03087) 24 1
= 2.0744 1 = 1.0744 = 107.44 %
360 15 = 24
1
m
(1+ I m) 1
= (1+ 0.3711 12) 12 1
= (1+ 0.0309) 12 1 = (1.0309) 12 1
= 1.441062 1 = 0.4410 = 44.10 %
360 30 = 12
1
m
(1+ I m) 1
= (1+ 1.632 8) 8 1
= (1+ 0.0204) 8 1 = (1.0204) 8 1
= 1.1753 1 = 0.1753 = 17.53 %
360 45 = 8
75
= .14 x $100,000
= $14,000
$ 16,300
= $16,300 $ 100,000
= 0.163
= 16.30%
76
CA - CL
CA CL
CA - Inventory CL
Firm A
200,000
1.25
0.5
Firm B
0
1
0.6
77
= 4,375 108,125
= 0.04046 (For 3 month)
78
79
1
m
(1+ I m) 1
= (1+ 0.1818 18) 18 1
= (1+ 0.0101) 18 1 = (1.0101) 18 1
= 1.1982 1 = 0.1982 = 19.82 %
360 20 = 18
1
m
(1+ I m) 1
= (1+ 0.4897 24) 24 1
= (1+ 0.02040) 24 1 = (1.02040) 24 1
= 1.6238 1 = 0.6238 = 62.38 %
360 15 = 24
1
m
(1+ I m) 1
= (1+ 0.2478 12) 12 1
= (1+ 0.02065) 12 1 = (1.02065) 12 1
= 1.27797 1 = 0.27797 = 27.79 %
360 30 = 12
1
m
(1+ I m) 1
= (1+ 0.2474 8) 8 1
= (1+ 0.03092) 8 1 = (1.03092) 8 1
= 1.2758 1 = 0.2758 = 27.58 %
360 45 = 8
80
= .15 x $150,000
= $ 22,500
$ 30,000
= $ 30,000 $ 150,000
= 0 .2
= 20%
(B)
Compensation Balance =
Interest Amount
=
$ 24,000
$ 22,500
Total Amount
=
$ 46,500
Net Proceed of = $ 150,000 - $ 46,500 = $ 103,500
Effective Interest Rate = $ 22,500 $ 103,500
Effective Interest Rate = 0.2173
Effective Interest Rate = 21.73%
81
CH # 20
(Account Receivable & Inventory Management)
(1+ i m) 1
= (1+ 0.1836 9) 9 1
= (1+ 0.0204) 9 1 = (1.0204) 9 1
= 1.1993 1 = 0.1993 = 19.93 %
360 40 = 9
(1+ i m) 1
= (1+ 0.7344 36) 36 1
= (1+ 0.0204) 36 1 = (1.0204) 36 1
= 2.0688 1 = 1.0688 = 106.88 %
360 10 = 36
82
(1+ i m) 1
= (1+ 0.3636 36) 36 1
= (1+ 0.01010) 36 1 = (1.01010) 36 1
= 1.4359 1 = 0.4359 = 43.59 %
360 10 = 36
(1+ i m) 1
= (1+ 0.3672 18) 18 1
= (1+ 0.0204) 18 1 = (1.0204) 18 1
= 1.4383 1 = 0.4383 = 43.83 %
360 20 = 18
83
(1+ i m) 1
= (1+ 0.5567 18) 18 1
= (1+ 0.0309) 18 1 = (1.0309) 18 1
= 1.7302 1 = 0.7302 = 73.02 %
360 20 = 18
(1+ i m) 1
= (1+ 0.2226 7.2) 7.2 1
= (1+ 0.0309) 7.2 1 = (1.0309) 7.2 1
= 1.2452 1 = 0.2452 = 24.52 %
360 50 = 7.2
84
(1+ i m) 1
= (1+ 0. 0.1392 4.5) 4.5 1
= (1+ 0.0309) 4.5 1 = (1.0309) 4.5 1
= 1.1469 1 = 0.1469 = 14.69 %
360 80 = 4.5
(1+ i m) 1
= (1+ 0.3789 7.2) 7.2 1
= (1+ 0.05263) 7.2 1 = (1.05263) 7.2 1
= 1.4467 1 = 0.4467 = 44.67 %
360 50 = 7.2
85
86
$540,000
$540,000
Average inventory
Average inventory
$90,000
360
Average Collection Period
(B)
Inventory turnover ratio
Inventory turnover
360
40
9 times
9 times
$480,000
Average inventory
9 times
Average inventory
$53,333
$1,150,000
Average inventory
Average inventory
$230,000
=
=
(0.86)($25,000,000)
$21,500,000 (CGS)
(C)
Cost of goods sold
Average inventory
(D)
(1 - Gross profit margin) (Sales)
Cost of Goods Sold
Average inventory
360
45
= 8 times
8 times
$ 2,687,500
87
$0 (no change)
88
$0 (no change)
89
2(3000)10
0.10
EOQ = 600,000
EOQ =775 units
(B)
Number of orders:
Order Cost= 10
Average Inventory(30002)
Carrying Cost(.1)
Total
1
10
1500
150
160
4
40
375
37.5
77.5
5
50
300
30
80
10
100
150
15
115
15
150
100
10
160
(C)
(1) Constant or uniform demand
(2) Constant unit price
(3) Constant carrying costs
(4) Constant ordering costs
(5) Instantaneous delivery
(6)
Independent orders
90
2 Sale orderingCost
CayrringCost
2(20,000)50
0.25
EOQ =
EOQ =
2828 boxes
(B)
It assumes among other things that the rolls are not perishable.
Other assumptions include:
(1) Constant or uniform demand
(2) Constant unit price
(3) Constant carrying costs
(4) Constant ordering costs
(5) Instantaneous delivery
(6) Independent orders
2 Sale orderingCost
CayrringCost
2 50,000 500
75
EOQ =
EOQ =
816.4 boxes
(B)
Carrying Cost = EOQ 2 75 = 30,165
Ordering Cost = Sales EOQ 500= 30,622.24
Total Cost = Carrying Cost + Ordering Cost
Total Cost = 30,165 + 30,622.24 = 61,237.24
91
2 Sale orderingCost
CayrringCost
EOQ =
2(500,000)90
.40
(b)
Orders per year
500,000
= 33
15,000
(c)
Inventory order point = delivery time stock + safety stock
Inventory order point =
1
50
x 500,000 + 15,000
(d)
Average inventory =
EOQ
+ safety time stock
2
Average inventory =
15,000
+ 15,000
2
92
(1+ i m) 1
= (1+ 0. 1469 7.2) 7.2 1
= (1+ 0.0204) 7.2 1 = (1.0204) 7.2 1
= 1.1565 1 = 0. 1565 = 15.65 %
360 50 = 7.2
(1+ i m) 1
= (1+ 0. 3673 18) 18 1
= (1+ 0.0204) 18 1 = (1.0204) 18 1
= 1.4385 1 = 0.4385 = 43.85 %
360 20 = 18
93
(1+ i m) 1
= (1+ 0. 2424 24) 24 1
= (1+ 0. 01010) 24 1 = (1. 01010) 24 1
= 1.2727 1 = 0. 2727 = 27.27 %
360 15 = 24
(1+ i m) 1
= (1+ 0. 1048 5.14) 5.14 1
= (1+ 0.0204) 5.14 1 = (1.0204) 5.14 1
= 1.1094 1 = 0.1094= 10.94 %
360 70 = 5.14
94
(1+ i m) 1
= (1+ 0. 0454 4.5) 4.5 1
= (1+ 0. 0101) 4.5 1 = (1.0101) 4.5 1
= 1.0426 1 = 0.04626 = 4.62 %
360 80 = 4.5
(1+ i m) 1
= (1+ 0. 3750 9) 9 1
= (1+ 0.04166) 9 1 = (1.04166) 9 1
= 1.4439 1 = 0.4439 = 44.39 %
360 40= 9
95
(1+ i m) 1
= (1+ 0. 0. 2368 4.5) 4.5 1
= (1+ 0.05263) 4.5 1 = (1.05263) 4.5 1
= 1.2596 1 = 0.2596 = 25.96 %
360 80 = 4.5
(1+ i m) 1
= (1+ 0.3789 18) 18 1
= (1+ 0.05263) 18 1 = (1.05263) 18 1
= 2.5175 1 = 1.5175 = 51.75 %
360 20 = 18
96
97
$ 495,000
$ 495,000
Average inventory
Average inventory
$ 99,000
360
Average Collection Period
Inventory turnover
360
35
10.285 times
10.285 times
$480,000
Average inventory
10.285 times
Average inventory
$ 46,669
$1,250,000
Average inventory
Average inventory
$ 208,333
=
=
(0.85) ($25,000,000)
$21,250,000 (CGS)
(B)
Inventory turnover ratio
(C)
Cost of goods sold
Average inventory
(D)
(1 - Gross profit margin) (Sales)
Cost of Goods Sold
Average inventory
360
50
= 7.2 times
7.2 times
$ 2,951,389
98
$0 (no change)
99
$0 (no change)
100
2(3500)9
0.2
EOQ = 315,000
EOQ =562 units
(B)
Number of orders:
Order Cost= 09
Average Inventory(35002)
Carrying Cost(.2)
Total
1
9
1750
350
359
4
36
437.5
87.5
123.5
5
45
350
30
115
10
90
175
35
125
15
135
116.6
23.32
158.32
(C)
(1) Constant or uniform demand
(2) Constant unit price
(3) Constant carrying costs
(4) Constant ordering costs
(5) Instantaneous delivery
(6)
Independent orders
101
2 Sale orderingCost
CayrringCost
2(21,000)55
0.20
EOQ =
EOQ =3398.52 boxes
(B)
It assumes among other things that the rolls are not perishable.
Other assumptions include:
(1) Constant or uniform demand
(2) Constant unit price
(3) Constant carrying costs
(4) Constant ordering costs
(5) Instantaneous delivery
(6) Independent orders
2 Sale orderingCost
CayrringCost
EOQ =
2(55,000)500
70
EOQ =
886.4 boxes
(B)
Carrying Cost = EOQ 2 75 = 31,024
Ordering Cost = Sales EOQ 500= 31,038
Total Cost = Carrying Cost + Ordering Cost
Total Cost = 31,024+ 31,038= 62,062
102
2 Sale orderingCost
CayrringCost
2(600,000)90
.45
EOQ =
(b)
600,000
= 39 orders
15,400
(c)
Inventory order point = delivery time stock + safety stock
Inventory order point =
1
50
x 600,000 + 15,000
(d)
Average inventory =
EOQ
+ safety time stock
2
Average inventory =
15,400
+ 15,000
2
103