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In: Finance
Question 1 You have been tasked to assist with Nox Pte Ltd’s (Nox) working capital management....
Question 1
You have been tasked to assist with Nox Pte Ltd’s (Nox) working capital management. Extracts of the firm’s financial statement are given as follows:
| FY2018 | |
| REVENUE | 24,000 |
| COST OF SALES | -18,000 |
| GROSS PROFIT | 42,000 |
| TRADE RECEIVABLES | 8,000 |
| INVENTORIES | 7,500 |
| PREPAYMENTS | 350 |
| TRADE PAYABLES | 7,000 |
| ACCRUALS | 650 |
Management is considering a change in its credit policy from terms of net 30 to terms of 2/30, net 90 to attract more customers. The firm is able to borrow from OCBC Bank at 12% per year, where interest is charged monthly.
Currently, Nox orders 2,500 glass panels every week so that it can fulfill its production requirements. As these glass panels are bulky, the storage cost for the 2,500 panels is $6,000 per week. The fixed cost per order is $150.
Assume 365 days (or 52 weeks) in a year.
(a) Calculate the operating and cash cycles for FY 2018.
(b) Explain how could management use the information from the answers in part(a)?
(c) Calculate the effective annual rate (EAR) of
(i) extending cash discount and
(ii) borrowing from OCBC Bank.
Advise management if they should proceed to change its credit terms.
(d) Determine and appraise whether Nox’s inventory policy is optimal.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
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