Liquidity management risk

Please see the attached file. The calculations should be performed in excel and the the theory should be typed in a word file as per required words limit.ACFI3422 Liquidity and Risk assessment – March sittingSimulated assessment centre un-seen material (includes pre-seen)Wright Ltd (Wright) is a UK company that manufactures cutlery for restaurants, it is the largest supplier for one of the UK’s largest restaurant chains. It has a year-end of 30th of November. Its liquidity ratios have been calculated for the previous 2 years:-2019 2018 Industry AverageCurrent Ratio 1.7: 1 2.3: 1 2.2Quick Ratio 1 : 1 1.3: 1 1.2Inventory Days 75 64 78Receivables Days 87 60 63Payables Days 98 70 68Gross Profit Margin 23% 20% 20%Operating Profit Margin 11% 10% 12%Wright has forecast the following for the year ended 30th of November 2020 :-Credit managementSales to increase to £4 million for the year to come.Receivables forecast to be £1,150,000.The cost of financing receivables is covered by an overdraft at the interest rate of 5% p.a.Wright is now considering offering a cash discount of 0.5% for payment of debts within 20 days.  It is expected that 25% of customers will take up the discount.Inventory managementWright is also trying to find the optimum order quantity for its inventory. Monthly demand for its inventory which costs £2.30 per unit is 80,000 units per month.  The cost per order is currently £1.25. The holding cost of 1 unit p.a. is £1.Wright’s suppliers have offered a discount of 0.5% per unit for orders of 2,000 units or more.Cash managementWright has a constant demand for cash totalling £5,000,000 p.a. It can replenish its current account by selling a constant amount of gilts which are held as an investment earning 3% p.a. The cost per sale of gilts is a fixed £8 per sale.The management of Wright have also considered using the Miller-Orr model of cash management. They have considered a lower limit of £1,000,000, the standard deviation of the daily cash flows is £40,000 and it will cost £12 per transaction to transfer money to or from the bank. The interest rate is 3% p.a.Unseen materialIt is now March 2021 and the financial results for Nov 30th 2020 have been published.2020 2019 Industry AverageCurrent Ratio 2.2: 1 1.8: 1 2.1Quick Ratio 1:1 0.9: 1 1.1Inventory Days 81 75 82Receivables Days 92 87 62Payables Days 107 98 82Gross Profit Margin 22% 23% 20%Operating Profit Margin 10% 11% 12%Credit managementSales are forecast to be £5m for the year ahead.Receivables forecast to be £1,100,000.The cost of financing receivables remains the same.Inventory managementMonthly demand for its inventory remains the same but the cost has increased to £2.90 per unit. The cost per order has increased to £1.44. The storage cost of 1 unit p.a. is £0.60.Cash managementAll details remain the same, except the annual demand for cash is now £6,400,000.Tasks for evaluationThe managers of Wright want you to evaluate the company’s liquidity position to help you do this, calculate the following: – Section A – CalculationsThe benefit (or otherwise) of offering a discount of 0.25% for payment of debt within 16 days. Take up for which is thought to be 26%. (20 marks)Calculate the optimum quantity of inventory to order if the suppliers now offer a discount of 0.32% per unit for orders of 2,300 units or more. Wright’s Cost of Capital is 20%. (20 marks)Calculate the lower limit, upper limit and return point for Wright if the standard deviation of cash flows is £45,000 per day.(10 marks)Section B – EvaluationUsing the working capital ratios for 2019 and 2020 evaluate the liquidity position of Wright. (400 words) (20 marks)The Covid-19 pandemic has not really been considered due to the hypothetical nature of the company. Suggest how the situation may have impacted Wright’s liquidity position if it were a real company and evaluate how the JIT system of inventory management might have helped Wright.  (400 words) (20 marks)f)  Explain the ABC approach to inventory management and critically evaluate how it might be applied by Wright plc. (200 words) (10 marks)

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