Assignment:
1. A firm offers terms of 2.0/7, net 60.
a. What effective annual interest rate does the firm earn when a customer does not take the discount?
b. What effective annual interest rate does the firm earn if the terms are changed to 3/7, net 60, and the customer does not take the discount?
c. What effective annual interest rate does the firm earn if the terms are changed to 2/7, net 75, and the customer does not take the discount?
d. What effective annual interest rate does the firm earn if the terms are changed to 2/12, net 60, and the customer does not take the discount?
2. It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter's management is considering a lockbox system to reduce the firm's collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $131,000, and the required rate of return is 6 percent per year. Assume 365 days per year.
What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the end of the month? The beginning of the month?
3. No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4.2 million in collections a day and requires a $310,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $2.1 million of collections a day, and each requires a compensating balance of $160,000. No More Books' financial management expects that collections will be accelerated by one day if the eastern region is divided.
1) What is the NPV of accepting the system
2) What will be the annual net savings? Assume that the T-bill rate is 2.4 percent annually.