(/365 NPM.(1 T PM.( 1 +(i/365x D) neric . AReceivables +Anventory. Payables g #
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(/365 NPM.(1 T PM.( 1 +(i/365x D) neric . AReceivables +Anventory. Payables g # Chapter 2 Inv COGS/365 cc C DIH + DSO-DPO . A/R Sales/365 DSO COGS/365 Homework Problem Chapter 4: Inventory Management You have heard so much about the just-in-time inventory concept that you have decided to investigate your current inventory system. Assurme a production period of 120 days. 30 TA Your operation requires inventory of 5,000 units of inventory over that period. Inventory is us evenly over the production period. Your current system is to place 4 orders of 1.250 unitsieach. You order and receive the inventory on the same day along with the invoice. Invoice terms are net 15 days) Inventory costs $10 per unit and the orderisetup costs are estimated to be $400 per order. Physical inventory holding costs average about $5 per unit over the production period of 120 days. Order/setup costs and holding costs are paid at the end of the production period You wish to evaluate whether placing 8 orders of 625 results in a lower present value cost 1. If the company's appropriate discount rate is 12 percent, calculate the present value cost of the current inventory policy 2. Using the same discount rate, calculate the present value cost of the alternative 3. Which alternative do you recommend your company choose? Why? 4. Suppose that the alternative inventory policy would increase the chances of ntory policy stocking out. What actions could you take to reduce that risk? How would you revise your NPV analysis to incorporate those actions? 5. npu Is 1241.83 Pay Ordt 1 50o 0 009 329767 1 0 , 0 0032876 7 lo3 11oExplanation / Answer
CURRENT INVENTORY POLICY Quantity required over production period 5000 Current order Quantity 1250 Number of orders 4 (5000/1250) Ordering costs $ 1,600 (400*4) Amount of order=1250*10 $ 12,500 Average inventory in units 625 (1250/2) Cost of inventory holding $ 3,125 (5*625) Invoice term: net 15 days Discount rate=12% Discount rate for 15 days period=(12/24)=0.5% 0.005 Number of 15 days period=120/15 8 Present value(PV) of cash flow=(Cash flow)/((1+i)^N) i=discount rate=0.005, N=period of cash flow Cash flow: N Period 1 2 3 4 5 6 7 8 A Payment for inventory purchase $ 12,500 $ 12,500 $ 12,500 $ 12,500 B Payment for Ordering cost $ 1,600 C Holding cost $ 3,125 D=A+B+C Total payments $ 12,500 $ - $ 12,500 $ - $ 12,500 $ - $ 12,500 $ 4,725 SUM E=D/(1.005^N) Present Value of payments= $ 12,438 $ - $ 12,314 $ - $ 12,192 $ - $ 12,071 $ 4,540 $ 53,556 Present Value cost of the current policy $ 53,556 ALTERNATIVE INVENTORY POLICY Alternative policy order Quantity 625 Number of orders 8 (5000/625) Ordering costs $ 3,200 (400*8) Amount of order=625*10 $ 6,250 Average inventory in units 312.5 (635/2) Cost of inventory holding $ 1,563 (5*312.5) Invoice term: net 15 days Discount rate=12% Discount rate for 15 days period=(12/24)=0.5% 0.005 Number of 15 days period=120/15 8 Present value(PV) of cash flow=(Cash flow)/((1+i)^N) i=discount rate=0.005, N=period of cash flow Cash flow: N Period 1 2 3 4 5 6 7 8 A Payment for inventory purchase $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 6,250 B Payment for Ordering cost $ 3,200 C Holding cost $ 1,563 D=A+B+C Total payments $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 6,250 $ 11,013 SUM E=D/(1.005^N) Present Value of payments= $ 6,219 $ 6,188 $ 6,157 $ 6,127 $ 6,096 $ 6,066 $ 6,036 $ 10,582 $ 53,470 Present Value cost of the Alternate policy $ 53,470 Alternative inventory policy is recommended This policy will have lower present value of costs 4 In order to reduce the risk of stock out a safety stock of inventory can be maintained 5 The Carrying cost of safety stock should be added to the cash flow at end of period Based on Simulation , a safety stock may be determined to minimize the cost Suppose Safety stock is 10 units Cost of carrying safety stock=10*5=$50 Present Value of cost of carrying safety stock= $ 48 (50/(1.005^8) RevisedNPV of Costs $ 53,518 (53470+48)
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