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I have found many different solutions to this questions here on Chegg, and all of them give different answers, so I am very confused, as
I have found many different solutions to this questions here on Chegg, and all of them give different answers, so I am very confused, as to how an accurate solution of this question would look. Could you explain why there are so many different solutions as well?
Lemon Brothers, a large Lemon distributor in the US is selling
tons per year on credit at an average selling price of $
per ton. The average customer payment is for purchasing
ton lemons per customer. Treasury bills are currently yielding
percent per year. The current credit term of Policy is net no
cash discount and the customers, on average, pay days overdue.
The company is considering offering an alternative credit term of
net Policy and anticipates that percent of its
customer will take advantage of the discounts. Policy will reduce
the collection period to days, assuming days a year.
Alternatively, the company can use a shortterm financing from
Silicon Bank charging an annual interest rate of percent on the
shortterm loans.
The company is factoring all receivables immediately at a
percent discount. It is also considering opening a lockbox
perpetually in Silicon Bank that provides this service for an annual
fee of $ plus cents per check cleared for each purchase.
The lockbox will make cash available to the company one day
earlier than the current case.
Requirements:
a What are the average receivables under Policy and Policy
marks
b Under Policy what is the effective annual cost of factoring
assuming that default is extremely unlikely.
marks
c Under Policy what is the average collection period for those
customers who do not take the discount?
marks
d Under Policy what is the implied interest charged on the
payment of an average customer paid within days?
marks
e Should the company adopt Policy or use the shortterm
financing provided by Silicon Bank?
marks
f How many customer purchases are needed each day to make the
lockbox service affordable for the company?
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