# Chapter 11 by pengtt

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```									Solutions to Problems: Chapter 11
1.    NPV of adopting ACH disbursement system versus paying by check.
ASSUMPTIONS:
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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