A Firm Faces a Liquidity Crunch and Must Decide Between

question 49

Multiple Choice

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest or stretching its payables for one quarter. If it stretches the payables it will forgo a 2% discount for timely payment. Based solely on cash flows, which would you suggest?

• A) Stretching saves the firm approximately 8% per year.
• B) Use the bank loan; forgoing a cash discount is costly.
• C) Stretch the payables and finance at a savings of approximately 3.75% annually.
• D)Use the bank loan because it represents simple interest.

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Definitions:

Process-Focused

An approach that prioritizes the optimization and efficiency of business processes in order to improve performance and quality.

Repetitive Manufacture

A production process in which identical products are continuously produced over a long period of time.

Crossover Point

The point at which two different strategies, options, or actions have equal costs or benefits, used in decision-making to determine the most viable option under specific conditions.

Highly Automated

Referring to processes, systems, or operations that extensively utilize automation technology to minimize human intervention.