4541 Answer Key Midterm W13

AK/ADMS 4541 Advanced Corporate Finance
Winter 2013
Mid-Term Exam Answer Key
Question 1 (35 marks)
a.)

b.)

(8 marks)
(4 marks)
Calculating the EOQ.
EOQ =
SQRT(2 * F * T / H) = (2 * 80 * 200,000 / 1.00)0.5
EOQ =
5,656.85 kg
(4 marks)
Calculating the EOQ savings.
Total cost = (F * T/Q) + (H * Q / 2) = (80 * 200,000 / 10,000) + (1.00 * 10,000/2)
Total Cost @10,000 kg =
$6,600
Total Cost EOQ = (F * T / Q) + (H * Q / 2) where Q = 5,656.85 kg
= (80 * 200,000 / 5,656.85) + (1.00 * 5,656.85 / 2) = $5,656.85
Savings with EOQ = $943.15
= $6,600 - $5,656.85 per planning period

(10 marks) Try Q (actually, EOQ) = 5,656.85 kg.
Then total cost = order costs + holding costs + purchase costs
= (80)(200,000) / 5,656.85 + (1.00)(5,656.85) / 2 + (4.98)(200,000)
= $2,828.425 + $2,828.425 + $996,000 = $1,001,656.85
Try Q = 5,000 kg
Then total costs = (80)(200,000) / 5,000 + (1.00)(5,000) / 2 + (4.98)(200,000)
= $1,001,700.00
Try Q = 6,000 kg
Then total cost = (80)(200,000) / 6,000 + (1.00)(6,000) / 2 + (4.97)(200,000)
= $999,666.67
(As total cost is decreasing as quantity increases, try larger quantities in ‘000s.)
Try Q = 7,000 kg
Then total costs = (80)(200,000) / 7,000 + (1.00)(7,000) / 2 + (4.97)(200,000)
= $999,785.71
Try Q = 8,000 kg
Then total costs = (80)(200,000) / 8,000 + (1.00)(8,000) / 2 + (4.96)(200,000)
= $998,000.00
Try Q = 9,000 kg
Then total costs = (80)(200,000) / 9,000 + (1.00)(9,000) / 2 + (4.96)(200,000)
= $998,277.78
Try Q = 10,000 kg
Then total costs = (80)(200,000)/10,000 + (1.00)(10,000)/2 + (4.95)(200,000)
= $ 996,600.00 (Lowest Cost is at 10,000 kg)
Try Q = 11,000 kg
Then total costs = (80)(200,000)/11,000 + (1.00)(11,000)/2 + (4.95)(200,000)
= $ 996,954.55
The optimal quantity considering quantity discounts is 10,000 kg.
(Note that due to quantity discounts, you need to continue calculations until quantity discounts end. If you find “local” minimums like 6,000 or 8,000 kg, lose 2 marks.)

c.)

(10 marks) This is similar to pricing a bond, only the PMTS