Posted: August 29th, 2021

Suppose a firm pays a $50,000 trade credit obligation to a supplier in cash.

ASSUMPTIONSBalance Sheets(current assets shaded)20072008200920102011Cash & Equivalents$75$75$90$100$100Accounts Receivable300400600550500Inventory150250350250250Net Fixed Assets525575610540465Total Assets$1,050$1,300$1,650$1,440$1,315(current liabilities
shaded)Accounts Payable$125$175$250$225$200Notes Payable16516217813699Accrued Operating Exp.601611658976Long-Term Debt50040030010050Shareholders Equity200402757.2890.2890.2Total Liabilities &
NW$1,050$1,300$1,650$1,440$1,315Income StatementsRevenues (Sales)$1,500$2,250$3,000$2,000$1,500Cost of Goods Sold6009001200800600Operating Expenses600797895750725Depreciation3550657075Interest3033282510Taxes9418832514236Net Profit141282487.221354Dividends408013280542.)
Suppose a firm pays a $50,000 trade credit obligation to a supplier
in cash.A. What impact does this transaction have on the firm's current
ratio if the initial current ratio equaled 1?B.
What impact does this transaction have on the firm’s current ratio if
the intial current ratio is 0.5?C. What impact does this
transaction have on the firm’s current ratio if the initial current ratio
equaled 1.7?4. Mississippi
Delta, Inc. has been selling switching equipment to computer companies on
net-30 terms, in which payment is expected by 30 days from the invoice
date. Concerned about deteriorating
collection patterns, the credit manager has divided customers into two groups
for examination purposes:
Prompt payors
and laggards. Prompt payors (80 percent
of Mississippi Delta’s customers) pay, on average, in 35 days, versus a 72-day
average for the laggards. The manager
wonders if the credit terms should be modified to include a 2 percent cash
discount on invoices paid within 10 days.
The average invoice is the same for both groups, roughly $4,000. The manager expects 50% of the prompt payors
to pay in exactly 10 days and the average on the other half to slip to 40
days. He thinks that 20% of the laggards
will pay in 10 days and the average on the others will slip to 80 days. Given these forecasts, he is not sure that
the lost revenue from discount takes (who would then pay only 98% of the
invoiced dollar amount) justifies the improved collection. The company’s annual cost of capital is
11%.A.)Using NPV calculations, show the PV of the
present collection experience.
B.)Calculate the NPV of the proposed 2/10, net-30
terms.
C.) Based on your NPV analysis, should Mississipi
Delta Inc. adopt the cash discount?
D.) What other factors should be taken into account
before Mississippi Delta Inc. makes a switch, assuming such is justifiable on
an NPV basis?
E.)Sensivity analysis involves varying the key
assumptions, one at a time, and observing the effect on the key decision
criterion-such as profits or NPV. In the
NPV analysis above, how could could one carry out sensitivity analysis? (If you have a financial spreadsheet
available, conduct a sensitivity analysis that varies the number of prompt
payors who will pay in exactly 10 days and report your findings.)

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