Posted: February 5th, 2019
FINC620 – Davenport – Quiz 5 100% CORRECT SOLUTION
1.
Solar
Engines manufactures solar engines for tractor-trailers. Given the fuel
savings available, new orders for 105 units have been made by customers
requesting credit. The variable cost is $8,400 per unit, and the credit price
is $10,250 each. Credit is extended for one period. The required return is
1.2 percent per period. If Solar Engines extends credit, it expects that 20
percent of the customers will be repeat customers and place the same order
every period forever, and the remaining customers will place one-time orders.
Calculate the NPV of
the decision to grant credit.(Do not round intermediate calculations and round your final
answer to 2 decimal places. (e.g., 32.16))
2.
Tidwell, Inc., has weekly credit sales of
$18,500, and the average collection period is 52 days. The cost of production
is 75 percent of the selling price. What is the average accounts
receivable figure?(Do not round intermediate calculations and round your final answer
to 2 decimal places. (e.g., 32.16))
3.
The
Harrington Corporation is considering a change in its cash-only policy. The
new terms would be net one period. The required return is 2.0 percent per
period.
Current Policy
New Policy
Price per
unit
$
62
$
64
Cost per
unit
$
34
$
34
Unit sales
per month
2,600
?
What is the break-even
quantity for the new credit policy?(Do not round intermediate calculations and round your final
answer to 2 decimal places. (e.g., 32.16))
4.
Air Spares is a wholesaler that
stocks engine components and test equipment for the commercial aircraft
industry. A new customer has placed an order for eight high-bypass turbine
engines, which increase fuel economy. The variable cost is $1.7 million per
unit, and the credit price is $2.055 million each. Credit is extended for one
period, and based on historical experience, payment for about 1 out of every
125 such orders is never collected. The required return is 2.0 percent per
period.
a-1.
What is the NPV per engine
purchased on credit? (Enter your answer in dollars, not millions of
dollars, i.e. 1,234,567. Do not round intermediate calculations and round
your final answer to 2 decimal places. (e.g., 32.16))
a-2.
Assuming that this is a one-time
order, should it be filled? The customer will not buy if credit is not
extended.
b.
What is the break-even probability
of default in part (a)? (Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))
c-1.
Suppose that customers who donât
default become repeat customers and place the same order every period forever.
Further assume that repeat customers never default. What is the NPV per
engine purchased on credit? (Enter your answer in dollars, not millions
of dollars, i.e. 1,234,567. Do not round intermediate calculations and round
your final answer to 2 decimal places. (e.g., 32.16))
c-2.
Assuming the customer becomes a
repeat customer, what is the break-even probability of default?(Do not round
intermediate calculations and round your final answer to 2 decimal places.
(e.g., 32.16))
5.
Bell
Tolls, Inc., has an average collection period of 58 days. Its average daily
investment in receivables is $91,100.
What is the
receivables turnover?(Use 365 days a year. Do not round intermediate calculations and
round your final answer to 4 decimal places. (e.g., 32.1616))
What are annual credit sales?(Use 365 days a year. Do not round intermediate calculations
and round your final answer to 2 decimal places. (e.g., 32.16))
