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Latest- BUSINESS FINANCE II assignment

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4         a)   Explain why proper working capital management is important for the financial success of a    company.                                                                                                                                                6 marks

                                                                                                                                               

b)      The management of Furaha Packers Ltd. is planning to carry out two activities at the same time to:

i)                    determine the best credit policy for its customers

ii)                   find out the optimal level of ordering orange juice from its suppliers

 

The following data have been collected to assist in making the decisions:

1.            Annual requirements of orange juice are 4,200 litres.

  1. The carrying cost of the juice is Sh.16 per litre per year.
  2. The cost of placing an order is She.16 per litre per year.
  3. The required rate of return for this type of investment is 15% after tax.
  4. Debtors currently are running at Sh.120 million and have an average collection period of 40 days.
  5. Sales are expected to increase by 25% if the credit terms are relaxed and to result in an average collection period of 60 days.
  6. 60% of sales are on credit.
  7. The gross margin on sales is 30% and is to be maintained in future.

 

Required

i)             Use the inventory (Baumol) model to determine the economic order quantity and the ordering and holding costs at these levels per annum.                                                                                       9 marks

ii)            Determine if the company should switch to the new credit policy.                                        5 marks

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