Question

5) Use Table 1. What is the accounts receivable turnover?

	Credit Sales	Uncollected Amount
January	$100,000	$10,000
February	125,000	15,000
March	150,000	25,000
April	175,000	60,000

a) 4.58 times b) 5 times c) 5.75 times d) 6.44 times e) 7.44 times

6) George Gonzalez is evaluating a proposal to extend credit to a group of new customers. The new customers will generate an average of $45,000 per day in new sales. On average, they will pay in 75 days. The variable cost ratio is 75%, collection expenses are 5% of sales, and the cost of capital is 11%. What is the NPV of one day's sales if George grants credit? Assume that there is no bad debt loss.

a) $9,288.77 b) $8,820.19 c) $8,055.09 d)$7,385.44 e) $6,246.46

13) Credit analyst John Adams is considering a $1,000 order from a new customer. The variable cost of filling the order is 75% of sales. John estimates collection costs are 5% of sales. The customer will pay in 45 days. If the appropriate cost of capital is 10%, what is the NPV of extending credit to the new customer?

a) $339.44 b) $282.65 c) $251.89 d)188.43 e) $166.94

14) The XYZ Company has annual average purchases of $275,000 and an ending accounts payable balance of $20,000. How long, on average does XYZ take to payfor its purchases?

a) 66.36 days b) 59.73 days c) 51.10 days d) 36.60 days e) 26.55 days

Answer 1

Solution A
	Sale	Uncollected
January	100,000	10,000
February	125,000	15,000
March	150,000	25,000
April	175,000	60,000
	550,000	110,000
AR turnover=	Credit Sale/Uncollected
AR turnover=	550000/110000
AR turnover=	5.00
So option B is correct
Solution B
Sale revenue	45,000
Less collection expense	5.00%	45000*5%
Net Sale revenue	42,750
PV of sale revenue	42750/(1+11%*75/365)
PV of sale revenue	41,805.09
Variable cost-45000*75%	(33,750.00)
NPV	8,055.09
So option C is correct
Solution C
Sale revenue	1,000
Less collection expense	5.00%	1000*5%
Net Sale revenue	950
PV of sale revenue	950/(1+10%*45/365)
PV of sale revenue	938
Variable cost-1000*75%	(750.00)
NPV	188.43
So option D is correct
Solution d
Annual Purchase	275,000
Ending Accounts payable	20,000
AP turnover	275000/20000
AP turnover	13.75
Days required	365/13.75
Days required	26.55
So option E is correct