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Hi,
I had a problem solving this question, because the question is:
"Identify the maximum amount of money Ankor can hope to raise from customers within three weeks"
However the solution calculates how much money Ankar can raise in one week. In calculating the amount for three weeks I did:
60x0,65x(0,7 + 0,3*0,7 + 0,3*0,3*0,7). That is, every week Ankar con raise 70% of the outstanding debt from its customers.
My question is, why does the question say THREE weeks instead of ONE. Did I misunderstand something or is it just an error?
Please find the complete problem below.
Thanks.
Néstor
Ankor Inc. will have to file for bankruptcy if it cannot make a $60 million interest payment due in one week. The company currently has $18 million in cash reserves, $56 million due from customers, and $33 million in other non-cash assets; the company has no other resources. The company must keep at least $4 million cash on hand in order to continue operating. If Ankor demands immediate payment from customers, the company’s CFO estimates that any one customer will be able to repay no more than 70% of its outstanding balance within one week. The largest customer, responsible for 35% of the total due, will be upset if immediate payment is demanded and will reduce future purchases.
Identify the maximum amount of money Ankor can hope to raise from customers within three weeks without losing business and the minimum that it must raise from its “other non-cash” assets. Make only two selections, one in each column.
Maximum from customers Minimum from other non-cash assets Dollar amount (millions)
6.80
19.60
20.52
25.48
26.40
39.20
The question indicates that Ankor is trying to avoid two things: bankruptcy and losing business. The company needs $60 million in 1 week and currently has only $18 million in cash. Further, if the company demands immediate payment from its largest customer, that customer will reduce the amount of business it does with Ankor.
The company’s customers owe it $56 million, and the company also has $33 million in “other non-cash” assets. How will it raise the needed $60 million without losing any business?
The prompt indicates that Ankor needs to keep $4 million in cash on hand. Out of the $18 million the company currently has in cash, then, only $14 million is available to go towards the $60 million interest payment. That leaves the company with a further $46 million to raise in one week.
The final two sentences of the prompt provide complicated information about the $56 million due from customers. First, we’re told that the CFO thinks that any customer will be able to repay “no more than 70%” of the money it owes within only one week. Next, we’re told that the largest customer is responsible for 35% of all of the money due from customers, and that, if Ankor demands immediate payment from this customer, then Ankor will lose business. Ankor, then, cannot demand immediate repayment from this customer (since it is trying not to lose business), so at most, Ankor can try to demand immediate repayment of 100% - 35% = 65% of the $56 million due, or (56 million)(0.65) = $36.4 million. Of that $36.4 million, though, the CFO thinks that at most 70% would actually be paid in 1 week, or (36.4 million)(0.7) = $25.48 million.
If the company gets $25.48 million from its own customers and $14 million from its own cash reserves, then it will need to raise an additional ($60 million - $25.48 million - $14 million) = $20.52 million from its other non-cash assets.
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