Question: Three Jays Corporation Case Question

What changes would you recommend to the calculation of the carrying cost i? (Hint: to determine the correct cost of capital, consider 3 scenarios:

1. If a firm has an excess of cash, then the cost of capital tied up in inventory is the interest lost that could have been earned by investing the money;

2. If the funds could be better used- --other than in inventory-by investing in a project that would generate additional revenues and profits, or significantly reduce costs, then the cost of capital is the opportunity cost associated with not having the funds available for that specific project;

3. If the firm needs to borrow money in order to establish these inventories, then the cost of capital is equal to the interest rate on the borrowed funds.)