Question 1:
Suppose a firm pays a $50,000 trade credit obligation to a supplier in cash.
a. What impact does this transition have on the firm's current ratio if the initial current ratio equaled 1?
b. What impact does this transition have on the firm's current ratio if the initial current ratio equaled 0.5?
Problem 2:
Mississippi Delta, Inc. has been selling switching equipment to computer companies on net-30 terms, in which payment is expected by 30 days from the invoice date. Concerned about deteriorating collection patterns, the credit manager has divided customers into two groups for examination purposes.
a. Using NPV calculation, show the preset value of the present collection experience.
b. Calculate the NPV of the proposed 2/10, net-30 terms.
c. Based on your net-present-value analysis, should Mississippi Delta Inc. adopt the cash discount?
d. What other factors should be taken into account before Mississippi Delta Inc. makes a switch, assuming such is justifiable on an NPV basis?