Apache's first ouarter's 2019 financials are being prepared and the CFO wants you to use them to calculate days receivable, days imventory, operating cycle, days payable, and cash cycle for each of the three months of 1Q19. The financials are below: 1019 Income Statement (in MS) Mar. Jan. Feb. Sales 123 131 144 Cost of goods sold 78 83 89 Gross margin 45 48 55 Sales, general & admin. 12 13 12 Interest expense Taxable income 30 33 41 Tzxes Net income 24 26 32 1019 Balance Sheet (in MS) Jan. Feb. Mar. Cash 625 814 900 Receivables 160 177 200 122 Inventory 105 124 Curr. Assets 890 1,114 1,224 1,176 PPSE 1,176 1,176 2.066 Total Assets 2,290 2,400 Payables 120 122 131 Notes Payable Accruals 30 34 38 LTD 50 50 50 Curr. Liabilities 200 206 219 300 300 300 LTD Equity 1,566 1,784 1,881 Total LGE 2,400 2,066 2,290 Problem 2 2 Apache sells maintenance services to various privatejet operators. For these, Apache's demands payment within 30 dzys. Apache is considering changing this policy to 1/5, net 30. What is the implicit effective annual rate in this payment policy? b. Apache's maintenance service business grosses some $20M per year before discounts and its average days receivable is 30 (unlike the overall business where this number is -40). If 25% of Apache's dients opt to pay earlier and get the discount what will be the change in the service business's receivables? If Apache's cost of capital is 8%, what are the projected savings of this change in policy? IFApache's gross margin is 40%, by how much will gross dollar revenues have to rise to offset the loss from discounts? in percent? cAnew client from out of town is quoted $6,000 for a repair. The service people ask you to approve this. You do a quick check on the client and assess a 15% defaultrisk. What is the NPVof the client? What is the break-even probability? What is the minimum probability of collecting for you to approve the service? c) One-Time Client a) Effective Annual Rate (EAR) b) Average Collection Period Notional purchase Discount (%) Days difference Repair cost Default probability Gross revenue Avg. receivables before new policy % paying early Avg. receivables after new policy NPV of client Break-even probability Extend credit if Discount ($) Rate (%) Days difference in 1 year Change in receivables Cost of capital Projected savings in capital costs probability of getting paid is higher than minus: discounts EAR Projected savings net of discounts Gross margin Gross revenues must rise by: - in dollars in percent
