Deck 21: Cash and Inventory Management

Question 1

The annual cash requirement for a firm is $1,000,000.The cost for each security transaction is $20 and current short-term return is 5 percent.Using Baumol's model estimate the initial cash balance.

A) $21,285.16
B) $28,284.27
C) $11,152.16
D) $16,814.28

Answer 1

$28,284.27

Question 2

How much value would be added to a firm that could permanently reduce its collection period by two days if daily collections average $10,000 and the opportunity cost is 5 percent annually?

A) $1,000
B) $1,200
C) $10,000
D) $20,000

Answer 2

$20,000

Question 3

Lockbox systems allow local banks to collect and process the firm's remittance from that area.

Answer 3

True

Question 4

Concentration banking allows the banks to use the local collection system to clear the customers' cheques.

Question 5

The Canine Kennel uses 600 cases of dog food annually and orders 40 cases in each shipment.If the annual carrying cost per case (due to opportunity costs and extremely large dogs)is $5,what is the total annual carrying cost for dog food?

A) $100
B) $196
C) $200
D) $250

Question 6

Baumol's model is not very useful in practical applications,because it does not allow for uncertain cash flows.

Question 7

Short-term securities have high interest-rate risk.

Question 8

Just-in-time inventory management is suitable for an aircraft manufacturer,like Boeing,whose production schedules are known well in advance.

Question 9

The cost of holding inventory is the interest paid on the money used to buy the inventory.

Question 10

As the number of inventory orders per year increases,the total order costs increase.

Question 11

What approximate value should a firm put on being able to permanently reduce the length of its collection period by one day if annual sales (all on credit)are $5,000,000 and the appropriate opportunity cost is 10 percent annually?

A) $1,370
B) $15,068
C) $13,700
D) $50,000

Question 12

The economic order quantity does not account for delivery lags in its reorder points.

Question 13

How much money can be saved annually by setting up a lock-box system that will process 500 cheques per day at a cost of $0.20 per cheque if each cheque averages $220,collection float is reduced by three days,and the annual interest rate is 8 percent?

A) ($27,700)
B) ($10,100)
C) $10,000
D) $16,400

Question 14

A common characteristic of money market instruments is their high degree of liquidity.

Question 15

In concentration banking,a firm directs customers to make payments to a local branch office of a bank.

Question 16

The economic order quantity is that order quantity that minimizes total order costs.

Question 17

One way of handling uncertain cash flows is to set an upper and lower limit for cash balances and a return point to which the cash balance is brought to when the upper or lower limit is reached.

Question 18

While many firms may hold too much cash,it is virtually impossible to hold too little cash.

Question 19

If there is an increase in interest rates,a firm which uses Baumol's model should reduce the funds held in cash and reduce the holding of interest-bearing securities.

Question 20

Repos are long-term unsecured loan agreements.

Question 21

What are the minimum total costs of carrying and ordering inventory for a firm that sells 1,500 units with a carrying cost of $2 per unit and places orders in lots of 100?

A) $100
B) $200
C) $400
D) $430

Question 22

What is the economic order quantity for firm that sells 30,000 units annually,each unit has a $6 carrying cost,and the fixed cost of placing an order is $100?

A) 100 units
B) 122 units
C) 707 units
D) 1,000 units

Question 23

How many cases of microwave popcorn are sold annually by a firm which has total annual order costs of $32,000,orders in units of 100 cases,and is charged $90 per order in addition to the $72 per case product cost?

A) 20,250 cases
B) 35,556 cases
C) 44,444 cases
D) 49,383 cases

Question 24

How much time must be saved to justify a lock-box system that processes 350 cheques per day at an average amount of $400 per cheque if the system will cost $20,000 annually and interest rates average 8 percent?

A) 0.56 days
B) 1.79 days
C) 2.14 days
D) 7.00 days

Question 25

FastBucks Inc.has offered to set up a concentration banking system that will save three days of mail float and one day of presentation float.Your receivables average $20,000 per day and the opportunity cost of funds is 6 percent.How much would you be willing to pay FastBucks annually to administer the system perpetually?

A) $2,400
B) $4,800
C) $40,000
D) $80,000

Question 26

A firm has estimated that it will need $3,000,000 net cash during the year.Current interest rate on money market securities is 6 percent per year and the cost of buying and selling securities cost $50 per transaction.What is the optimal transaction size of securities?

A) $70,710.68
B) $25,100.00
C) $65,285.21
D) $92,511.11

Question 27

What are the expected annual savings from a lock-box system that collects 150 cheques per day averaging $500 each,and reduces mailing and processing times by 2.5 and 1.5 days respectively,if the annual interest rate is 7 percent?

A) $5,250
B) $13,125
C) $21,000
D) $300,000

Question 28

What is the benefit for a firm with daily sales of $30,000 to be able to speed up collections by three days,assuming an 8 percent annual opportunity cost of funds?

A) $7,200 daily benefit
B) $7,200 annual benefit
C) $30,000 annual benefit
D) $90,000 annual benefit

Question 29

The economic order quantity for a product is 500 units.However,new orders require five working-days lead time during which time 60 units will be used.Given this information,the correct economic order quantity is:

A) 440 units.
B) 500 units.
C) 507 units.
D) 560 units.

Question 30

What is the total carrying cost for an inventory of 200 widgets if the per-widget carrying cost is $4,the cost per order is $14,and there are 5 orders per year?

A) $400
B) $470
C) $800
D) $870

Question 31

A system by which firms assign their customers for collection purposes to regional banks that transfer funds to a central bank is known as:

A) a lock-box system.
B) a zero-balance account.
C) a wire transfer.
D) concentration banking.

Question 32

ABC Corp.shows a ledger balance of $50,000 prior to writing a cheque for $5,000 and depositing $1,000 in cheques.What is the amount of their net float?

A) $1,000
B) $4,000
C) $5,000
D) $6,000

Question 33

ABC Corp.disburses $4 million annually and keeps idle funds in Treasury bills which earn an average of 5 percent and incur a fixed cost of $35 each time a cash conversion is made.What is the average amount of cash that ABC Corp.should have on hand?

A) $16,733
B) $33,466
C) $37,417
D) $74,833

Question 34

Find the break-even size of wire transfer if the cost of wire transfer is $20,the daily interest rate is 0.02 percent and the reduction in float is three days.

A) $1,000
B) $25,000
C) $33,333
D) $100,000

Question 35

What is the average inventory level,based on EOQ,for a firm that has annual sales of 2,500 units,costs per order of $45,and carrying costs of $5 per unit?

A) 35
B) 75
C) 106
D) 237

Question 36

Shamba Corporation writes cheques that average $90,000 and take on average 5 days to clear.Cheques are received with an average value of $45,000 and take 9 days to clear.Determine the net float.

A) $45,000
B) $60,000
C) $855,000
D) $135,000

Question 37

A primary purpose of restricting the investment of idle cash balances to money market instruments is to:

A) obtain government guarantees on the investment.
B) minimize transaction costs.
C) carry a minimal amount of interest-rate risk.
D) have a continual market for selling the investment.

Question 38

What is the economic order quantity for an automobile dealer selling 2,000 cars per year,at a cost of $750 per order,and a carrying cost of $300 per automobile?

A) 40 cars
B) 71 cars
C) 100 cars
D) 126 cars

Question 39

What is the opportunity cost of keeping a cash balance of $2.5 million,if the daily interest rate is 0.025 percent and the average transaction cost of investing money overnight is $50?

A) $121
B) $171
C) $575
D) $675

Question 40

Preauthorized payments allow customers to do one of the following.

A) pay the bills using a credit card
B) arrange with their bank to have the account debited directly
C) allow creditors to charge their credit card directly
D) agree to pay the loan in fixed installments, with interest

Question 41

Baumol's model is not suitable for a firm that experiences:

A) high cost of selling securities.
B) low level of annual cash disbursements.
C) increased variability of cash flow.
D) high average cash balance.

Question 42

In the Baumol model,the optimal sale amount is _____ with higher interest rates and ______ with a higher cost of selling securities.

A) increased; increased
B) decreased; increased
C) decreased; decreased
D) increased; decreased

Question 43

Potential savings from a lockbox system will be reduced by:

A) the additional processing time required.
B) the additional mailing time required.
C) local bank charges.
D) an increase in interest rates.

Question 44

Your corporate financial manager has decided to liquidate securities to provide for cash needs in units of $50,000.Is that amount of cash consistent with annual cash needs of $2,500,000,costs per sale of $30,and annual T-bill rate of 6 percent?

A) yes, that amount is appropriate
B) no, sales amount should be increased to $60,000
C) no, sales amount should be decreased to $35,000
D) no, sales amount should be decreased to $5,000

Question 45

Which of the following conditions would make a lockbox system potentially more attractive to a firm?

A) the interest rate declines
B) mail time saved is lower
C) payment size is higher
D) processing time saved is lower

Question 46

An East Coast firm should establish a lock-box service on the West Coast:

A) if the firm has a large number of customers.
B) if it has banking facilities in west coast.
C) if West Coast customers are currently mailing their cheques to an East Coast address.
D) if West Coast banks are more efficient.

Question 47

Which of the following statements is not true?

A) optimal inventory levels involve a trade-off between carrying costs and order costs
B) carrying costs include the cost of storing goods as well as the cost of capital tied up in inventory
C) inventory levels will be lower when storage or interest costs are high and will be higher when restocking costs are high
D) inventory level does not rise in direct proportion to sales. as sales increase, the optimal inventory level rises, but more than proportionately

Question 48

Your cash manager is currently using wire transfer to obtain collections from distant locations each time that the cash accumulates to $50,000.Evaluate the financial logic of this policy if the wire transfer costs $20,saves three days of mail time,and interest rates average 7 percent annually.

A) Stop the policy; $8.77 is lost with each transfer.
B) Stop the policy unless the transfer amount is increased to approximately $65,200.
C) Continue the policy at the current transfer amount.
D) Improve policy by reducing transfer amount to $34,800.

Question 49

A firm with unpredictable cash flows is trying to set upper and lower limits for cash balances.Which of the following factors will result in upper and lower limits being closer to each other?

A) variance of the cash flows is low
B) cost of trading securities is high
C) interest rate is low
D) current cash balance is low

Question 50

The economic order quantity:

A) is the order size that minimizes the costs of orders.
B) is independent of forecast sales.
C) is a simplified, and even simplistic, version of the real process.
D) increases as cost per order decreases.

Question 51

Short-term securities are safe to keep idle cash balance.Choose from the following,one appropriate reason for this.

A) low interest-rate risk
B) high returns
C) high net present value
D) ease of receiving interest payments

Question 52

Recent interest rate increases have increased the cost of carrying the inventory.What will be the effect of this on EOQ,if the sales and order costs remain the same?

A) EOQ will not change
B) EOQ will increase
C) EOQ will decrease
D) EOQ will increase slightly

Question 53

Which of the following would not be included in inventory carrying cost?

A) insurance expense for the inventory
B) opportunity cost of capital for inventory investment
C) cost of inventory
D) cost of shelf space

Question 54

Which of the following would not be considered a money market instrument?

A) Canadian Treasury bill with 91 days until maturity
B) Commercial paper with 180 days until maturity
C) Certificate of deposit with 15 months until maturity
D) A repurchase agreement, backed by U.S. government securities, with less than one week until maturity

Question 55

Which of the following represents a serious concern for those firms employing the Baumol model of cash management?

A) market illiquidity when selling bills
B) high interest-rate risk
C) low rates of return on treasury bills
D) a volatile rate of cash disbursements

Question 56

If the volatility of the daily cash flows decreases,a firm will:

A) increase the cash balance.
B) decrease the cash balance.
C) not change the cash balance.
D) increase the return point.

Question 57

A firm using Baumol's model will do one of the following if the interest rate on short-term securities went up.

A) increase the average cash balance
B) increase the collection period
C) decrease the collection period
D) decrease the average cash balance

Question 58

Money market securities usually have a maturity of:

A) more than one year.
B) less than one year.
C) one to three years.
D) less than 91 days.

Question 59

A firm's safety stock represents the:

A) inventory having passed quality-control inspection.
B) largest order size that retains minimum order costs.
C) inventory of most frequently ordered items.
D) reorder point that considers lags and uncertainties.

Question 60

A lockbox service will benefit the following firm the most.

A) firm has a large number of suppliers
B) firm writes a large number of cheques daily
C) firm has geographically dispersed customer base
D) firm sells goods to a very few customers

Question 61

Which of the following is true for a "repurchase agreement"?

A) Non-collateralized loan
B) Long-term borrowing agreement
C) Uses Bills as collateral for loan
D) Borrows money from government

Question 62

With rates of return so low on money market instruments,does it actually benefit a firm to pay close attention to cash balances?

Question 63

The Quick Corp.has implemented procedures to cut 1.5 days from their cash collection process.Annual sales (all charge sales)are $30 million and the opportunity cost of funds is 9 percent.What is the value of the annual savings,and how much would the savings be worth if the speed-up in collections can be considered permanent?

Question 64

The Green Transfer Co.utilizes a concentration banking system and is determining whether to request wire transfers or depository transfer cheques.What would you suggest,given the following: wire transfer saves three days of float but increases costs by $45.The current interest rate is 10 percent annually.Next year,however,technological changes will occur that reduce the float savings to two days from three,and the incremental costs will be reduced to $35.

Question 65

What are the cost and benefits of holding cash?

Question 66

What are the cost and benefit of holding inventories?

Question 67

Which of the following is correct for a firm that places orders for an item in amounts greater than the economic order quantity?

A) the marginal reduction in order cost exceeds the marginal carrying cost per item
B) the marginal carrying cost per item exceeds the marginal reduction in order cost
C) total order costs exceed total carrying costs
D) total cost of ordering and carrying has been maximized

Question 68

Discuss the distinction of playing the float versus cheque kiting.

Question 69

Which of the following statements is true regarding repurchase agreements?

A) their maturity is greater than one year
B) they are an unsecured form of borrowing
C) treasury bills serve as their collateral
D) they make explicit, rather than implicit, interest payments

Question 70

What are some tactics to increase net float?

Question 71

Which of the following is correct about wire transfer of funds,given that wire transfer saves three days,the annual interest rate is 6 percent,and the cost of wire transfer is $20?

A) wire transfers should be preferred for amounts exceeding $2,400
B) depository transfer cheques should be preferred for amounts under $121,667
C) wire transfers should be preferred for amounts exceeding $40,556
D) depository transfers should be preferred for amounts exceeding $121,667

Question 72

In the Baumol model,increases in the T-bill rate suggest that:

A) average cash balances should be increased.
B) average cash balances should be decreased.
C) the cost per sale of securities will increase.
D) fewer sales should be conducted each year.

Question 73

A manager estimates that her firm benefits from an average float time of six days.Which of the following is true if the firm averages $15,000 per day in payments?

A) the firm is losing interest on $90,000 per year
B) the firm's ledger balance averages $90,000 more than the bank's ledger balance
C) the firm has $45,000 in net float
D) the available balance at the bank is $90,000 greater than shown on the firm's books

Question 74

Thrifty Corp.is establishing a lock-box system to reduce time in the collection process.They anticipate saving two days of mail time and .75 days of processing time through the system.Six hundred payments are expected to be collected daily,at an average size of $200.The appropriate interest rate is 6 percent per year.What is the break-even charge per item that you could consider paying to a bank for providing this service?

Question 75

Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that is 50 percent higher than total carrying costs?

A) current order size is greater than optimal
B) current order size is less than optimal
C) per unit carrying costs are too high
D) the optimal order size is currently being used

Question 76

A corporation has excess cash that does not appear to be needed for several months.How can they evaluate the differences between parking their funds in commercial paper versus repurchase agreements?

Question 77

What is float and why can it be valuable?

Question 78

From the day a cheque is put in the mail,discuss the delays before it is credited or debited appropriately; e.g.,discuss the issue from the perspective of both payer and recipient.

Question 79

Assuming that the firm can either hold cash paying no interest or invest in marketable securities,which of the following might induce the manager to hold higher cash balances?

A) the cost of borrowing is high relative to interest rates on marketable securities
B) future cash flows are relatively predictable
C) the cost of cash balances is relatively high
D) bank interest rates are expected to increase

Question 80

If the marginal reduction in order costs exceeds the marginal carrying cost of inventory,then:

A) the firm has minimized its total carrying costs.
B) the firm should increase its order size.
C) the firm should decrease its order size.
D) the firm has maximized its order costs.