Homework in Financial Management - Assignment Example

Cycle – Occurs because one or more stages of production cannot supply all items simultaneously.
De-coupling – Allows processes to work independently.
Anticipation – They are accumulated in anticipation that demand for goods will rise in future.
Pipeline – Exists because goods cannot be transported instantly.
After discussing the difference between types of inventory it is clear that while some types depend on demand (like anticipation, buffer) others are independent of demand or more dependent on the process or business cycle.

US Treasury Bills – Although it is the most liquid short-term security it is considered a risk-free investment. This could lead to a potential disadvantage for corporations’ cash management because the yields of these securities are nominal that may not be sufficient for current cash requirements.

Ordinary Preferred Stock – It allows a company to raise capital without diluting voting rights where the investor is eligible to receive regular dividends. This is in contrast to the nature of pure equity where the investor shares the risk of the firm. This would require regular cash outflow by the firm.

NCDs – They allow the companies to raise capital from investors by promising returns at a specified rate of interest on deposits. NCDs also allow the investor to trade security in stock markets so that the investor may exit the option before maturity. But when the corporation is not able to earn regular cash as a result of which its weighted average cost of capital exceeds interest earned then NCDs may become a burden for the corporate.

Commercial Papers – They are issued by corporations having good credit ratings and market reputation allowing them to raise capital from investors directly without any intermediary (like banks). This reduces the cost of borrowing but requires the company to repay investors at its own expense.  

Eddy Manufacturing may use EOQ (Economic Order Quantity) to optimize inventory policies. Given that,
Number of hinges = 1,150
Cost per switch = $5.50
Fixed order cost = $625
 √ [2 x 1150 x (625/5.5)] = 22.61 or 22.

This means that Eddy Manufacturing should produce 22 units to optimize its inventory policies.

From the given information if the cost of carrying per phone is $26 per year and the fixed order cost is $340 then the carrying cost per phone is approximately 13.08 (that is, 340/26) and the total carrying cost for 740 phones is approximately $9676.92 (that is, 13.08 x 740).

Cost of re-stocking = (26*740/2) = $9620 (less than the total cost of carry)

From the above calculations, it is clear that the company should increase order size as the storage cost is cheaper than the cost of carry. Also, the optimal inventory policy would require the company to produce 38 phones [since, √ [2 x 740 x (340/26)] = 38.04].
Total annual carrying cost = [(1.16 x 400/2) + 28] = $260
Total annual restocking cost = $477.

JIT inventory management system allows manufacturers to eliminate certain warehousing and inventory expenses without affecting the quality of production. More specifically, the pros of the JIT inventory management system are:
- Minimizes Inventory,
- Free up resources to use elsewhere,
- Allows workforce to focus on primary tasks,
- Increased efficiency,
- Increased productivity

However, some of the cons of JIT are:
- Relatively complex strategy compared to other inventory control and management systems.
- Requires complete re-design of the current production process which may be costly.
- Requires changes in the supply-chain management system.
- Involves closer locations and multiple suppliers.
- All goods must meet quality requirements to avoid production shutdown.

It is given that Macros Inc..s to maintain a minimum cash balance of $20 million which is also the amount of cash the company currently holds in hand. The current receivables balance of the given company is $187 million. On the basis of this information and other details of Sales, cash disbursement and cash collection, the cash budget of Macros Inc 

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