Chapter 11 by pengtt

VIEWS: 15 PAGES: 2

									Solutions to Problems: Chapter 11
1.    NPV of adopting ACH disbursement system versus paying by check.
      ASSUMPTIONS:
        ACH Corporate Trade Payments                Checks
      Item            Cost per transaction   Item
      Process tape            $0.01          Check stock      $0.01
      Tape delivery           $0.01          Processing       $0.08
      Personnel               $0.03          Personnel        $0.14
      Bank service fees       $0.02          Postage          $0.22
      Tape transmission       $0.05          Bank charges     $0.14
      Return items            $0.01
      Lost float              $0.06
      TOTAL                   $0.19          TOTAL            $0.59

      initial investment            $40,000.00
      annual opp. cost              10%
      payments / mo.                1000

      Original solution using simple interest (given in text):
      NPV = PV of net cash flow - initial investment
      NPV = (payments/mo. * saving) / (k / 12) - initial investment
                                                            Recommended Action:

      NPV = $8,000.00                                      Go with ACH.

a.)   Assume initial investment = $60,000
      NPV = ($12,000.00)                                   Stay with checks.

b.)   Assume 5000 payments per month
      NPV = $200,000                                       Go with ACH.

c.)   Assume k = 5% per year
      NPV = $56,000.00                                     Go with ACH.

d.)   Assume per payment savings = $1.00
      NPV = $80,000.00                                     Go with ACH.

e.)   Assume all changes above in parts a - d
      NPV = $1,140,000                                     Go with ACH.

      The only situation that leads to rejection of the ACH system is an increase in
      the initial investment. The analyst would want to be sure about the accuracy
      of the initial investment estimate. Part e is very attractive for ACH.



                                        Page 190
                                        Chapter 11 - Page 191




3.    ACD, Inc. - switching from check payment to electronic payment.
      ASSUMPTIONS:
      average payment per period, A =      $20,000
      current credit period, nc =          45 days
      new credit period, ne =              48 days
      current check float, cc =            4 days
      new ACH float, ce =                  1 days
      variable cost per check, VCc =       $8.35
      variable cost per ACH debit, VCe =   $3.00
      annual opp. cost, k =                12%
      monthly opp. cost, i =               0.0003288


                        Day 0                                   Day 49 = 45 + 4
      -------------------|------------------------------------------------|------------------------------>

                         ($8.35)                                          ($20,000.00)
                         ($19,682.92)                                     |
                                                                          |
      PVc = ($19,691.27)                                                  |

                        Day 0                                  Day 49 = 48 + 1
      -------------------|---------------------------------------------|------------------------------>

                         ($3.00)                                      ($20,000.00)
                         ($19,682.92)                                 |
                                                                      |
      PVe = ($19,685.92)                                              |

a.)   Should ACD switch to electronic payments?
      Yes, the PV cost of the electronic payment option ($19,685.92) is less than
      the PV cost of the check payment option ($19,691.27).

b.)   Reconsideration of part a) if k = 8%
      PVc = ($19,795.84)
      PVe = ($19,790.49
      Although both (negative) PV values increase, it is still better to switch
      to electronic payments if the credit period ne is greater than nc by
      approximately the difference (cc - ce).

								
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