(10)1. In order to increase sales from their present annual $35 million, ABC Company, a retailer, is considering more liberal credit standards. Currently, the firm has an average collection period of 30 days. It believes that with increasingly liberal credit standards, the following will result: Credit Policy A B C D Increase in sales from previous level (in millions) $6.5 $4.5 $2.0 $1.0 Average collection period for incremental sales (days) 45 60 90 150 Bad-debt losses on incremental sales 2% 4% 10% 15% The prices of its products average $30 per unit, and variable costs average $25.50 per unit. If the company has a before- tax opportunity cost of 25%, which credit policy should be pursued? (20) 2. ABC Construction must replace a number of its concrete mixer trucks with new trucks. It has received two bids and has evaluated closely the performance characteristics of the various trucks. The truck A, which costs $84,000, is top-of-the-line equipment. The truck has a life of eight years, assuming that the engine is rebuilt in the fifth year. Maintenance costs of $2,500 a year are expected in the first four years, followed by total maintenance and rebuilding costs of $12,000 in the fifth year. During the last three years, maintenance costs are expected to be $4,000 a year. At the end of eight years the truck will have an estimated scrap value of $10,000. The trucks B cost $51,000 a truck. Maintenance costs for the truck will be higher. In the first year they are expected to be $4,000, and this amount is expected to increase by $1,500 a year through the eighth year. In the fourth year the engine will need to be rebuilt, and this will cost the company $18,000 in addition to maintenance costs in that year. At the end of eight years the truck will have an estimated scrap value of $7,000. a) Using MACRS (5-year property), estimate the after-tax cash flows related to the trucks? (Use Tax rate of 35%) b) If ABC Construction's opportunity cost of funds is 10%, which truck should it accept? C) If its opportunity cost were 15%, would your answer change? d) At what opportunity cost will truck A and B be equal? (20) 3. Proposals A, B, C, D, E, F and G are being considered with money flows over 10 years. A B C D E F G Investment $33,000 $12,000 $62,000 $41,000 $10,000 $48,000 $27,000 Net Annual Benefit $7,000 $2,200 $12,000 $9,000 $1,800 $11,000 $7,200 Salvage Value $3,000 $0 $5,000 $2,000 $500 0 $1,000 Proposal (A and G) are mutually exclusive, (C and D) are also mutually exclusive, proposal B depends on C or D, and proposal E depends on F and G. The MARR is set at 9%. a) Formulate the problem with Integer Programming. b) Which proposal(s) should be selected if the amount of money available for investment is $100,000
