Vedant Bhasin

Kimball International, Inc Case study

1. Comparing different policies/proposals to identify the most profitable one. In order

to do so, we will be adopting the NPV approach to the different proposals to see
which one has the highest present value. The formula used have been shown below;

S ( 1 - d ) p ( 1 - b ) S ( 1 - p ) (1 - b ) E X P (S )
Z = + - V C R (S ) -
(1 + i D P ) (1 + i C P ) (1 + i C P )
a) Proposal A
85,000,000 85,000,000
( 365 )
( 1−0 )( 1−0.017 )
85,000,000
0.02
365 ( )
Z ( e )=
0. 0 65
−0.45 ( 365
− ) 0.65
1+( 365 )
( 54 ) 1+
365 ((54 ) )
Z(e)= 117,333

95 , 000,000 9 5,000,000
( 365 ) (1−0 ) ( 1−0.0 2 )
−0.45 (
9 5,000,000
0.02 1 (
365 )
Z (n)=
0. 0 65 365 ) 1+ 0. 0 65 ( 66)
−
( 365 )
1+ ( 66 ) ( 365 )
Z(n)= 129,581

Z= Z(n)-Z(e)
=12,248

Total effect =
(12,248)
¿
0.065
365 ¿
¿

= 68,777,230

b) Proposal B

100 ,000,000 100 , 000,000

( 365 ) ( 1−0 ) (1−0.02 3 )
−0.45 (
100 , 000,000
0.0 3 (
365 )
Z (n)=
0.065 365 ) 1+ 0.065 ( 63)
−
( 365 )
1+ ( 6 3 ) ( 365 )
 Vedant Bhasin

Z (n)=133285.839652

Z= 133285.839652- 117,333

= 15953

Net effect= 15953/(0.065/365)

=89,582,230

c) Proposal C

105 , 000,000 10 5 , 000,000

( 365 ) ( 1−0 )( 1−0.0215 )
−0.45 (
105 , 000,000
0.025 (
365 )
Z (n)=
0.065 365 ) 1+ 0.065 ( 6 8 )
−
( 365 )
1+ ( 6 8 ) ( 365 )
Z(n)= 141560
Change in Z= 141560-117333
= 24,227

Net effect= 24227/(0.065/365)

= 136,043,923

Thus it is best for the company to adopt Proposal C as it has the highest change in
NPV. We used the discount rate of 6.5% instead of the prescribed WACC of 10% due
to the fact that the actual average opportunity cost of the cash in the company is 6.5%,
meaning that if surplus cash were to be invested somewhere it would give a return of
6.5% and not the prescribed 10%

2. The financial position of the company must be taken into account while drafting the
credit policy. In order to allow a longer collection period, the company must be
financially strong enough. If the company is to extend its collection period from 54
days to 68 days, it must have the ability to function normally even during those
extended 14 days. The logic of increasing the collection period operates under the
assumption that increasing the collection period by 14 days, will increase sales from
$85 million to $105 million. This increase in sales is enough to absorb increased
percentage of bad debts as well as higher administrative costs. The high current and
cash ratio indicates that the company is well suited to absorb this higher collection
period.

3. The assistant treasurer can respond to the head of the Electronics product (EP) unit
with the following points;
 Vedant Bhasin

 In the last year, the company has already pumped enough resources into
electronic products by acquiring ELMO Semiconductors, which comes under
the division of ‘Electronic Products’, just last year. The assistant treasurer
must explain to the EP unit head that they must wait and watch to see
whether the division is profitable or not.
 Furthermore, the company recently incurred larger administrative and
investment costs including spending $9 million on capital investments to
improve information systems. Therefore, the company cannot afford the
aggressive expansion of both the lodging group as well as the EP unit
 A flat investment income over the past years despite larger investments
being undertaken indicate that interest rates are low and the market has a
generally downward trend. This means that the company should brace itself
for a recession and cut costs wherever it can. Once, the lodging group has
attained market saturation, the company can pump more resources to its
other units.

4. The unilateral implementation of both proposals (loosening credit standards, and

extending the credit period) will inadvertently cause customers to switch over from
competition, and bring their business to Kimball International. However, competing
firms will not stand by and wait for their customers to be taken away. They will most
likely increase their payment terms as well and/or lower their prices or improve their
quality of product. The calculation for why customers will switch over to Kimball
International has been shown below;

For eg,
Customer A makes a purchase of $100 from Kimball international, which allows a
credit period of 60 days.

Customer B makes a purchase of $100 from a competing firm (X) , which allows a
credit period of 30 days.

The cost of capital is assumed to be 10% for both companies.

100
N PV ( Kimball)=
0.1
(1+ ( 60 ))
365

NPV (Kimball) = $98.38

100
N PV ( X )=
0.1
(1+ ( 3 0))
365

NPV (Company X) = $99.18

 Vedant Bhasin

Thus, the consumer would always choose the company with the higher credit collection
period as the consumer is making a profit of 99.18 - 98.38 = $0.80

Therefore, Kimball International must gradually increase its payment period, so it can benefit
from higher profits without competitors realizing.