Business Environment and Concepts'

savings is equal to $18,000 (6% x $300,000). Therefore, the firm will save
$10,000 by establishing the lockbox system.
6. International cash management involves managing cash balances in
accounts in the various countries in which the firm conducts business. Investment
opportunities and prevailing interest rates vary by country.
D. Firms hold marketable securities as a cash reserve. Therefore, the major
considerations with respect to the nature of the investments are liquidity and
safety. The following are typical investments that meet these criteria:
1. Treasury bills and notes—Obligations of the federal government. Treasury
bills are short-term and treasury notes are short-to-intermediate term.
2. Federal agency securities—Obligations of federal agencies, such as the
Federal Home Loan Bank.
3. Certificates of deposit (CD)—Savings deposits at financial institutions. Large
CDs have a secondary market.
4. Commercial paper—Unsecured short-term promissory notes issued by large
creditworthy corporations.
5. Banker's acceptance—A draft drawn on a bank for payment when presented
to the bank. Because banker's acceptances generally have to be presented from
thirty to ninety days after issuance they are often available at discounted prices as
investments.
6. Eurodollar certificates of deposit—CDs offered by foreign banks to obtain
dollars for the Eurodollar market.
7. Money market funds—Shares in a fund that purchases higher-yielding CDs.
E. The two goals of inventory management include: (1) to ensure adequate
inventories to sustain operations, and (2) to minimize inventory costs, including
holding costs, ordering and ~" receiving costs, and costs of running out of stock.
p
1. If a firm has a seasonal demand for its product, management must decide
whether to pro- — duce at a near uniform level of production all year or
produce at a high level during the „ season of peak demand. To determine the cost-
effective decision management must j compare the cost of holding
additional inventory under the uniform-level alternative to ^ the additional
production costs associated with the seasonal-production alternative.
2. A firm may also use inventory that is subject to fluctuating prices. In such
cases,
management should consider hedging strategies to reduce the effects of changing
prices.
3. The supply chain refers to a product's production and distribution processes.
It illus- c> trates the flow of goods, services, and information from acquisition of
basic raw materials | < through the manufacturing and distribution processes to
delivery of the product to the final consumer, regardless of whether those activities
occur in one or many firms. Supply chain management involves sharing of
information among firms in the supply chain to
minimize inventory levels and make the processes as
efficient as possible.
4. The economic order quantity model is used to
determine the inventory order quantity F that
minimizes inventory costs. It is calculated as follows:
i
EOQ =
Where:
a - cost of placing an order
. D = annual demand in units .
k = cost of carrying one unit of inventory for one year
24 - Working Capital Management