Blue Ridge Industries, Inc. Case Study Assingment Help With Solution
In the three preceding case studies, you have evaluated the firm’s financial condition, evaluated expansion proposals, and prepared a forecast of what the firm must do in 2014 to comply with the bank’s benchmark requirements.Now, the CEO of Blue Ridge Industrieswants to be able to present to the Board of Directors the following items:
1. Based on the major changes planned for 2014 the CEO would like to report to the board the changes in the firm’s Operating Cycle and Cash Cycle from 2013 to 2014.
2. An evaluation of a bank proposed Lockbox system that should speed up the collection of Accounts Receivable.
3. An evaluation and recommendation of Blue Ridge Industries major supplier’s new credit terms for 2014.
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REQUIRED ANALYSIS FOR CASE STUDY PART #4:
A. Operating Cycle and Cash Cycle for 2013 and 2014: Since the firm expects to make some major improvements in asset control in 2014, the CEO wants you to calculate the following:Enter your calculation on the spreadsheet labeled OPERATING & CASH CYCLES. (These calculations are similar to Chapter 26 Practice Problem 26-6. Remember to use average account balances in these calculations as instructed to do in your textbook.)
1. Inventory period for 2013versus2014
2. Receivables period for 2013versus2014.
3. Operating Cycle for 2013versus2014
4. Payables period for 2013versus2014
5. Cash Cycle for 2013versus2014
6. Assuming the Operating Cycle and the Cash Cycles improved in 2014; explain what SPECIFIC benefits the firm would expect to receive as a result of these improvements. (This is a theoretical question. Answer the question as asked regardless of the actual changes in the Operating and Cash Cycles of this case study.)
B. Evaluation of the Lockbox System: The bank has proposed a new lockbox system for Blue Ridge Industries that should speed up the collection of Accounts Receivable and improve the firm’s cash flow in 2014. The CEO wants you to prepare an analysis of the benefits and cost of the Lockbox proposal and make a recommendation about whether the firm should adopt the Lockbox system or not. Enter your calculation on the spreadsheet labeled LOCKBOX PROPOSAL.(These calculations are similar to Chapter 27 Practice Problem 27-8))
Lockbox Proposal:Based onits receivables history,Blue Ridge Industries found it takes about 9 days to receive and deposit checks from its customers. Blue Ridge Industries’ management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce receipt and deposit times to 3 days total. The required rate of return for this project will bethe firm’s 2014WACC (%)provided for you in the PREVIOUS CASE STUDY DATA.You will need to determine the Average Daily Collections for Blue Ridge Industriesbased on the formula:
Average Daily Collections2014 = Accounts Receivable2014 / Receivables Period2014
The questions that the CEO needs you to answer are as follows:
1. What is the reduction in Uncollected Accounts Receivable as a result of implementing the lockbox system?(Remember, uncollected accounts receivable = outstanding cash balances.)
2. What is the maximum monthly charge Blue Ridge Industries should pay for this lockbox system if the payment is made at the END of every month?
3. If the bank plans to charge a fee of $20,750 at the end of every month; is the lockbox service acceptable? Explain your answer.
4. Assuming the lockbox service is acceptable, what impact would this service have on a firm’s Cash balances and Account Receivable balances? (This is a theoretical question. Answer this question as asked regardless of whether you thought the lockbox service is acceptable or not.).
5. Calculate the changes to the firm’s 2014 Operating Cycle in the table provided in the spreadsheet based on accepting the lockbox service. Fill in the cells highlighted in YELLOWin the table provided on the LOCKBOX PROPOSAL worksheet.
Shown below are instructions for calculating the change in the firm’s 2014 Operating Cycle if the lockbox is accepted:
STEP 1. Determine Accounts Receivable 2014(With Lockbox):
= Accounts Receivable 2014(Without Lockbox) – Reduction in Accounts Receivable(With Lockbox)
STEP 2. Determine Average Accounts Receivable(With Lockbox):
= [Accounts Receivable 2013 + Accounts Receivable 2014(With Lockbox)] / 2
STEP 3. Determine Receivable Period 2014(With Lockbox):
= 365 days / (Sales 2014 / Average Accounts Receivable(With Lockbox))
STEP 4. Determine Operating Cycle 2014(With Lockbox):
= Inventory Period 2014 + Receivable Period 2014(With Lockbox)
STEP 5. Determine Difference in Operating Cycle 2014(With Lockbox):
= Operating Cycle 2014(Without Lockbox) − Operating Cycle 2014(With Lockbox):
C. Evaluation of the New Credit Terms: ACME Supply Company, Blue Ridge Industries’ largest supplier, has offered Blue Ridge Industries some radically new credit terms for 2014. ACME Supply is offering credit terms of 1%/10, net 45, which means that if the firm pays its ACME Supply invoices in 10 days it can deduct 1.0% from the invoice total, however, if it does not pay in 10 days then the firm will have to pay the entire amount of the invoice in 45 days. If Blue Ridge Industries pays ACME Supply in 10 days and takes the 1.0% discount the firm will have to borrow from the bank using Notes Payable and the CEO knows that the current interest cost on Notes Payable is 8.0%. He would like to be able to take the 1.0% discount but only if it makes financial sense.So the CEO wants you to answer the following questions:Enter your calculation on the spreadsheet labeled CREDIT POLICY EVALUATION. (These calculations are similar to Chapter28Practice Problem 28-5)
1. What is the effective annual interest rate the firm would be paying if it DOES NOT take the 1% discount and chooses to pay in 45 days (opportunity cost)?
2. Given that the interest rate on Notes Payable is 8.0%, make a recommendation to the CEO as to whether Blue Ridge Industries SHOULD or SHOULD NOT take the 1% discount.Be sure to explain your recommendation.
3. Assuming Blue Ridge Industries does take the 1% discount and pays invoices in 10 days, how would the firm’s Accounts Payable and Notes Payable account balances change. Tell me if these two accounts would INCREASE or DECREASE (REGARDLESS of what you recommended above) and EXPLAIN WHY.
4. Assuming Blue Ridge Industries does take the 1% discount and pays invoices in 10 days, what changes in the firm’s 2014 Operating Cycle and Cash Cycle would you expect (REGARDLESS of what you recommended above)? EXPLAIN YOUR ANSWER.
D. Complete all of your calculations in the Excel spreadsheet named “Case Study Part #4 (SPREADSHEET)(FALL 2014).xlsx”. Each part of the assignment has its own worksheet and I left the worksheet unprotected so you can develop your own formulas. However, you MUST put the required answers in the specific cells highlighted in YELLOW on every worksheet in order to get credit for your work.
E. When you have completed all parts of this assignment in the worksheet “Case Study Part #4 (SPREADSHEET)(FALL 2014).xlsx” submit the entire spreadsheet in Blackboard under the Case Study Part #4 heading. Your file MUST be file type .xls or .xlsx, no other file types will be graded.
1. It would be helpful if you would include your name in the filename of your submitted Case Study Part #4spreadsheet. For example: Your filename would be:
CASE STUDY PART 4 – Your First and Last Name Here.xlsx
Product Code :Case107
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