tomber f bivry 1,2016, tom hot air balloons. She is sure that increasing the number of balloonston, wh sales to increase. She thinks that an increase in inventory effectvese the present level will boost sales to higher levels in 2016 as shown,20 19-18. Ms. Terry McKay is the vice president of sales for Winde Sales (Units) Inventory Level (Units) 70 presel 016 100 340 375 390 400 Future (2016) (1) 80 (2) 90 (3) 100 Assume ordering costs are $160 per order, carrying costs are $400 per sales price is S16,000, unit purchase price is $12,800, and applicable incom is 40 percent. Also assume that any increase in the current assets will be f short-term notes at an interest rate of 7 percent, the long-term interest rate is 11 percent cost of capital for Windermere is 13 percent, cost of goods sold is 80 percent of sales, and other operating expenses are $130,000 under the present policy. The pro forma balance sheet items of the company under the present policy would be as follows: by cing Decisions 9 Cash and Securities Accounts Receivable Plant and Equipment Common Stock Retained Earnings $ 65,000 Accounts Payable $ 110,000 95,000 65,000 320,000 114,000 Notes Payable 113,000Long-Term Debt 80,000 Capital in Excess of Par 518,000 Also assume that the cost of goods sold and other operating expenses in the income statement and all current account items in the balance sheet vary directly with sales. Find out for Ms. McKay what level of inventory maximizes value of the firm by doing the following and comparing the net present values of the cash flows associated with each level of inventory: a. Calculate the EOQ, number of orders issued per year, and inventory cost. Develop pro forma income statements and balance sheets under the present and the future policies. b. c. Calculate the incremental cash flows for 2016 and the subsequent years. d. Advise Ms. McKay whether she should change the present inventory policy. If so which inventory level should she adopt? , Answers to Self-Test