Company places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which company meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year. The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility.

 What is the current total annual cost of inventory.

 What is the total annual inventory cost if company orders 30,000 components at a time.

  Company has annual credit sales of $25m and accounts receivable of $5m. Working capital is financed by an overdraft at 10% interest per year. Assume 365 days in a year. What is the annual finance cost saving if company reduces the collection period to 60 days.

 Which TWO of the following statements concerning working capital management are correct.

 The twin objectives of working capital management are profitability and liquidity.

 A conservative approach to working capital investment will increase profitability.

  Working capital management is a key factor in a company's long-term success.

 Liquid assets give the highest returns leading to conflicts of objectives.

Management at company are considering an aggressive approach to financing working capital.

Which of the statements relate to an aggressive approach to financing working capital management?

 1 All non-current assets, permanent current assets and part of fluctuating current

 assets are financed by long-term funding.

 2 There is an increased risk of liquidity and cash flow problems.

 

 Company is considering investing $46,000 in a new delivery lorry that will last for 4 years, after which time it will be sold for $7,000. Depreciation is charged on a straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows.

 Year $

1 16,500

2 23,500

3 13,500

4 (1,500)

 What is the return on capital employed (ROCE) for the lorry.

 Assuming operational cash flows arise evenly over the year, what is the payback period for this investment.

 An investor has a cost of capital of 10%. She is due to receive a 5-year annuity starting in 3 years' time of $7,000 per year. What lump sum amount would you need to offer today to make her indifferent between the annuity and your offer.

 A newspaper reader has won first prize in a national competition and they have a choice as to how they take the prize: 

 Option 1 Take $90,000 per year indefinitely starting in 3 years' time (and bequeath this right to their children and so on)?

  Option 2 Take a lump sum of $910,000 in 1 year's time. Assuming a cost of capital of 10%, which would you advise and why?