Question

-COGS NPV = = NU_ DailyNPV NPV = 4 Revenues 1+(365 *D)] ** 1+(365)(DPO) [+(365(D1H +DSO) 2) Adopting New Credit Terms - A firm believes it would experience an increase in NPV of $0.75 per day if it adopts new credit terms. If the annual opportunity cost of capital (i) is 10%, calculate the perpetual (aggregate) increase in shareholder value (NPV) from adopting the new terms. Recalculate the total increase in shareholder value using a i of 12%. Comment on the difference. 3) Renegotiating Credit Terms - You want to renegotiate longer credit terms with one of your suppliers from net 30 to net 45. Lengthening DPO would shorten the cash conversion cycle (CCC). Your firm purchases $1.2 million in inventory from this supplier every four months and your annual opportunity cost of funds (() is 8%. 1. Draw a time line of the two options for a single purchase. 2. Calculate the value of the savings from one purchase made under the new terms? Note: Discount the $1.2M purchase for 30 days, then separately discount the same amount for 45 days, then calculate the difference. 3. If the change is considered permanent, what is the NPV of the new terms? Note: Remember the firm buys every four months, so the result of the calculation is a benefit realized every four months (three times a year). If the renegotiation becomes permanent and the firm intends to continue purchasing from this supplier in the same amount on the same frequency, it benefits from the perpetuity in 4-month streams and we need an appropriate periodic interest rate. 4. If the change is expected to last only, say, three-years, what is the NPV of the new terms. Note: Calculate the PVA.

Answer 1

2)

Given,

Increase in NPV per day = $ 0.75

Annual opportunity cost of capital (k₁) = 10% or 0.10

Annual opportunity cost of capital (k₂) = 12% or 0.12

Solution :-

Perpetual increase in shareholder Value - increase in NPV x 365 days per day к, - $0.75 x 365 365 0.10 a $2737.50 Recalculation of Perpetual increase in Share holder value - increase in NPU & 365 days per day - $0.75 & 365 0.12 - $2281.25 The NPV ponto falls as the interest rate rises. Most of present value comes from near-term cash flow , now discounted at a higher rate.