1.Suppose it takes a computer manufacturer 10 days to build and sell computers.
ID: 2500416 • Letter: 1
Question
1.Suppose it takes a computer manufacturer 10 days to build and sell computers. Also suppose it takes the firm’s customers 30 days, on average, to pay for the computers after they have purchased them on credit. Finally, suppose the firm is able to delay paying for the computer parts it uses in the manufacturing process for 20 days. Given these conditions, how long is the firm’s cash conversion cycle.
2. Suppose your firm buys $1,000 worth of supplies on credit with terms 3/15 n60.
a. What does “3/15 n60” mean?
b. If you pay the bill on the 14thday after the purchase, what is the cost of the trade credit you have used for the 14-day period?
c. If you pay the bill on the 50thday after the purchase, what is the cost of the trade credit you have used for the 35-day period after the discount period ended?
3. If your firm buys $1,000 worth of supplies on credit with terms 3/15 n60 and pays the bill on the 60thday after the purchase:
a. What is the approximate, or “nominal,” cost of trade credit as an annual rate?
b. What is the exact cost of trade credit as an annual rate?
Explanation / Answer
CCC= 10+ 30 - 20 = 20 Days.
CCC = DIO + DSO - DPO
Days Inventory Outstanding (DIO) refers to the number of days it takes to sell an entire inventory. A smaller DIO is preferred. Days Sales Outstanding (DSO) refers to the number of days needed to collect on sales, or accounts receivable. A smaller DSO is also preferred. Days Payable Outstanding (DPO) refers to the company's payment of its own bills, or accounts payable. By maximizing this number, the company holds onto cash longer, increasing its investment potential. Thus, a longer DPO is preferred.
3/15 n60” mean: a 3% discount if the cash is paid with 15 days normal payment duration is 60 days b cost =1000*97% 970 c 1000Related Questions
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