Cash and MS Management

EIR Effective Interest Rate APR Annual Percentage Rate

Compounded interest rate Simple Interest/Year
also known as EAR Net borrowing cost/Net Proceeds
(effective annual rate) Does not take the effect of compounding

Solution to Sample Problem 15.5 on pp 842

Requirement 1 Bank 1 Bank 2 Bank 3

Interest Expense 500,000 500,000 500,000
Less: Income from incremental compensating balance 12,000 - -
Net borrowing cost 488,000 500,000 500,000

Principal 5,000,000 5,000,000 5,000,000

Less: Discounted interest - 500,000 -
Less: Incremental compensating balance 200,000 600,000 -
Net proceeds 4,800,000 3,900,000 5,000,000

APR 10.17% 12.82% 10.00%

Requirement #2

EAR =(1+(0.1017/4))^4-1
10.56%

Solution to Sample Problem 15.4 on pp 843

Wealth Rich Dad

Prime Lending Financing Consortium
Interest Expense 10,000 2,500 2,500
Net Proceeds 100,000 100,000 97,500
Periodic Interest Rate (PEBR) - Req #1 10.000% 2.500% 2.564%
Payment per Month 34,167 33,333
EIR --- using N ratio method (applicable only to add on interest) 15.31% 15.70%
1.28% 1.31%
EIR --- using Excel's rate function 1.24% 1.28%
14.94% 15.32%

Wealth Financing Amortization Proof

Proof >>> using EIR from N-Ratio
Payment Interest Principal Balance
100,000.00
Month 1 34,166.67 1,275.99 32,890.68 67,109.32
Month 1 34,166.67 856.31 33,310.36 33,798.96
Month 1 34,166.67 431.27 33,735.40 63.56 >>> close approximation of the EIR

Proof >>> using EIR from Excel:

Payment Interest Principal Balance
100,000.00
Year 1 34,166.67 1,244.87 32,921.80 67,078.20
Year 2 34,166.67 835.03 33,331.63 33,746.57
Year 3 34,166.67 420.10 33,746.57 0.00

Rich Dad Amortization Proof

Proof >>> using EIR from N-Ratio
Payment Interest Principal Balance
97,500.00
Month 1 33,333.33 1,275.98 32,057.35 65,442.65
Month 1 33,333.33 856.45 32,476.88 32,965.77
Month 1 33,333.33 431.42 32,901.91 63.86 >>> close approximation of the EIR

Proof >>> using EIR from Excel:

Payment Interest Principal Balance
97,500.00
Year 1 33,333.33 1,244.74 32,088.60 65,411.40
Year 2 33,333.33 835.08 32,498.26 32,913.15
Year 3 33,333.33 420.19 32,913.15 0.00

What if the credit term of Wealth Financing and Rich Dad is 3 years instead of three months?
Wealth Rich Dad
Financing Consortium
Interest Expense 30,000 30,000
Net Proceeds 100,000 70,000
Simple Interest Rate over the life if the loan 30.000% 42.857%
Payment per Year 43,333.33 33,333.33

EIR --- using N ratio method 14.24% 19.76%

EIR --- using Excel's rate function 14.360% 20.197%
Wealth Financing Amortization Proof
Proof >>> using EIR from N-Ratio
Payment Interest Principal Balance
100,000.00
Year 1 43,333.33 14,244.19 29,089.15 70,910.85
Year 2 43,333.33 10,100.67 33,232.66 37,678.19
Year 3 43,333.33 5,366.95 37,966.38 - 288.19 >>> close approximation of the EIR

Proof >>> using EIR from Excel:

Payment Interest Principal Balance
100,000.00
Year 1 43,333.33 14,359.67 28,973.67 71,026.33
Year 2 43,333.33 10,199.15 33,134.19 37,892.15
Year 3 43,333.33 5,441.19 37,892.15 -

Wealth Financing Amortization Proof

Proof >>> using EIR from N-Ratio
Payment Interest Principal Balance
70,000.00
Year 1 33,333.33 13,830.65 19,502.69 50,497.31
Year 2 33,333.33 9,977.29 23,356.04 27,141.27
Year 3 33,333.33 5,362.59 27,970.74 - 829.47 >>> close approximation of the EIR

Proof >>> using EIR from Excel:

Payment Interest Principal Balance
70,000.00
Year 1 33,333.33 14,137.91 19,195.42 50,804.58
Year 2 33,333.33 10,261.01 23,072.33 27,732.25
Year 3 33,333.33 5,601.09 27,732.25 -
Receivables Management

pp 868

Credit Effects to
Management
Variables Credit Policy Collection AR balance AR Turnover Collection Period
High (lax) slower increase decrease longer
Credit Cap Low (strict) faster decrease increase shorter
Low risk slower increase decrease longer
Credit Class High Risk faster decrease increase shorter

pp 869
EDR should be 37.34% instead of 36.73%.

Buyer EDR<ROI if money is used Ignore trade discount

Buyer EDR>ROI if money is used Avail of the trade discount

pp 869
Sample Problem 16.1
Doubtful accounts are expected to increase from 1% to 2 1 .75%

For the corrections in the solution table, refer to Neil's slides for TF class.
Corrections are already given to the MTh class.