18-6 Marion Crane, a financial analyst of Lifelong Appliances Company, is trying to develop a cash budget for each month of 2016. The sales are expected to occur as follows:

Month	Sales (in thousand dollars)
Nov 2015 (reference)	$131
Dec 2015 (reference)	$129
Jan 2016	$126
Feb 2016	$133
Mar 2016	$139
Apr 2016	$143
May 2016	$191
Jun 2016	$226
Jul 2016	$242
Aug 2016	$224
Sep 2016	$184
Oct 2016	$173
Nov 2016	$166
Dec 2016	$143
Jan 2017 (reference)	$136
Feb 2017 (reference)	$139

Assume all of Lifelongs sales are on credit, so no cash is received immediately when a sale is made. It is expected that 20 percent of Lifelongs customers will pay off their accounts in the month of sale, 70 percent will pay off their accounts in the month following the sale, and the remaining 10 percent of the customers will pay off their accounts in the second month following the sale. Given this payment pattern, help Marion in calculating Lifelongs actual monthly cash collections throughout 2016.

18-7. Use the same sales data given in problem 18-6. To improve the cash collections, Marion has decided to undertake stricter credit terms. With this change she expects that 40 percent of Lifelongs customers will pay off their accounts in the month of sale, 55 percent will pay off their accounts in the month following the sale, and the remaining 5 percent of the customers will pay off their accounts in the second month following the sale. Given this payment pattern, what would be Lifelongs actual monthly cash collections throughout 2016?

Accounts Receivable, ACP Credit Policy

19-4. If Fitzgerald in problem 19-3 decides to adopt more stringent credit terms of 2/10, n30, sales are expected to drop by 10 percent, but the following improved payment pattern of its customers is expected:

40 percent of customers will pay in 10 days.

58 percent of customers will pay in 30 days.

2 percent of customers will pay in 100 days.

Calculate the new average collection period (ACP) and accounts receivable (AR) assuming all goods are sold on credit.

Economic Order Quantity

19-12. TrailCrazer is updating its ordering strategy. Business has been increasing dramatically and it cant keep up with its current strategy. Executives have decided to implement the EOQ model to determine its ordering quantities and cycles. In 2015, TrailCrazer had the following costs:

Annual Sales	1,200 units
Carrying Costs	$100 per unit
Ordering Costs	$250 per unit per year

Calculate:

a. The EOQ

b. Number of orders to be placed each year

Challenge Problem

20-3. Hank Scorpio is considering borrowing $20,000 for a year from a bank that has offered the following alternatives:

a. An interest payment of $1,800 at the end of the year

b. An interest payment of 8 percent of $20,000 at the beginning of the year

c. An interest payment of 7.5 percent of $20,000 at the end of the year in addition to a compensating balance requirement of 10 percent

(i) Which alternative is best for Ralph from the effective-interest-rate point of view?

(ii) If Ralph needs the entire amount of $20,000 at the beginning of the year and chooses the terms under part c, how much should he borrow? How much interest would he have to pay at the end of the year?

Commercial Paper

20-6. The company run by Bubbles, Ricky, and Julian is planning a $1 million issue of commercial paper to finance increased sales from easing the credit policy. The commercial paper note has a 60-day maturity and 6 percent discount yield. Calculate:

a. The dollar amount of the discount

b. The price

c. The effective annual interest rate for the issue

Comparing Costs of Alternative Short-Term Financing Sources

20-15. To sustain its growth in sales, Monarch Machine Tools Company needs $100,000 in additional funds next year. The following alternatives for financing the growth are available:

a. Forgoing a discount available on trade credit with terms of 1/10, n45 and, hence, increasing its accounts payable

b. Obtaining a loan from a bank at 10 percent interest paid up front

Calculate the cost of financing for each option and select the best source.