Parrino Fundamentals Of Corporate Finance 2: The Time Value

Parrino Fundamentals Of Corporate Finance 2ethe Time Value Of Money

Parrino, Fundamentals of Corporate Finance, 2/e The Time Value of Money – Boch Automotive Ernie Boch, Jr.: My name is Ernie Boch, Jr. I’m third generation, my grandfather started this company in the mid ‘40s, my father took over in the late ‘50s, and I took over in the early 2000s. We retail automobiles; we have two Toyota stores, two Honda stores, Ferrari/Maserati, a used car center, and a body shop. I also distribute Subarus throughout New England. We have north or south of $100 million in the lot at one time.

New cars, until you get to the end of the model year, pretty much hold their value all year. But with used cars – I learned this from my father – used cars he considered used cars like a fruit stand. You have to turn over the inventory or the depreciation will kill you. It’s like fruit, you have to…you have to sell it while it’s fresh. We have a custom program for the retail stores that we developed that’s part of our proprietary software, which will punch up the oldest vehicle in stock.

So if you want a Corolla, the chances of you buying the Corolla that was just delivered yesterday is pretty rare, unless that car is rare, and it’s the only one that’s on the lot, and of course, you’d get it. But we keep the inventory moving very very well, so the cars are fresh, there’s no damage, everything’s beautiful. We’re not really chasing too much money that’s out there. The factory will help the dealer finance the vehicle. We pay within 30, sometimes 15.

They turn the vehicle, they don’t pay. Mark Doran: Well we’ve…our inventory at this store has been as high as over $50 million. My name is Mark Doran, I’m the general manager at Boch Honda. I’ve been with the Boch organization about 12 years. And I often use the time value of money in my remarks to the managers – the sales managers – on the desk.

We have to move these vehicles, and they’re not appreciating as they’re sitting in the back. Boch: I think the business is a success. I mean, it makes money, we’re…we lead the nation in sales, we lead the nation in innovation. There’s many many things we do that other dealers don’t do. Doran: The owner of the company used to pay cash for the vehicles; there was no floor plan.

Floor planning is that we finance through a bank that we have a relationship with. It’s cost-effective for the dealership and for the owner of the company for us to have that relationship with the bank. Boch: Well, we don’t have any mortgages, so we’re not paying the bank for the land and the building, and the strict cost control and the sheer volume that we do allows us to sell for less. Commercial: Nobody smashes sticker prices on new 1966 Dodge’s… Doran: On pre-owned cars, we…the rule of thumb is 60 days, and if we haven’t sold the car in 60 days, we send it to the auction. On new cars, we’ll have some cars in inventory, but we’d like to move them within 90 days.

Commercial: The second-largest Toyota dealer on the planet. Boch: My two Toyota stores sell as many cars as five or six or seven Toyota stores combined. Doran: There are many options to the customers on financing. Boch: You can pay cash for the vehicle out of your savings or wherever, you could finance it yourself with your credit union, your bank, or you could finance through us. And we are a pass-through, you aren’t financing with Boch Automotive, you’re financing with Toyota Motor Credit, or one of the many banks that we use. Doran: It makes the whole process a lot easier, if we can accommodate them and finance the vehicle here, they can often take the delivery of the vehicle the same day.

Paper For Above instruction

The concept of the time value of money (TVM) is fundamental in corporate finance, influencing decisions around financing, investment, and asset management. It posits that a dollar received today is worth more than a dollar received in the future, due to its potential earning capacity. This principle underpins many financial models and strategic decisions, such as inventory management, financing options, and capital budgeting, as exemplified by Boch Automotive’s practices.

Boch Automotive’s operational strategy vividly illustrates the practical application of TVM. Ernie Boch, Jr., emphasizes the importance of inventory turnover, likening used cars to fruit that must be sold while fresh to prevent depreciation losses. The firm’s proprietary software assists in managing inventory age, ensuring older vehicles are prioritized for sale, thereby minimizing holding costs and maximizing cash flow, aligning with fundamental TVM principles.

The dealership’s approach to inventory financing demonstrates an understanding of the cost-effectiveness of leveraging financial institutions through floor planning. Instead of paying cash upfront, Boch Automotive secures financing through banking relationships, reducing capital outlay and preserving liquidity. This strategy enhances their ability to maintain extensive inventory without significant capital tied up in unsold assets, thus optimizing the present value of their investment.

Moreover, the dealership’s emphasis on rapid inventory turnover reflects the importance of limiting the holding period of assets. Rules of thumb—60 days for pre-owned vehicles and 90 days for new—are used to delineate optimal selling periods to avoid the depreciation and diminished value associated with prolonged holding. This approach is grounded in the TVM concept, as quicker sales translate into accelerated cash inflows and enhanced financial efficiency.

Boch’s focus on financing options for consumers also exemplifies key applications of TVM. Customers can choose to pay cash, finance through banks or credit unions, or use dealership financing via Toyota Motor Credit or other banks. Offering multiple avenues allows for flexible payment structures, accounting for individuals’ time preferences and financial positions—highlighting the importance of valuing different cash flow timing and discount rates in financial decision-making.

The dealership’s nature as the second-largest Toyota dealer by volume further underscores the scale at which TVM principles are operationalized. Large sales volumes and rapid turnover accelerate cash inflows, improving liquidity and reducing the risks associated with delayed payments or depreciating assets. Boch’s operational efficiencies, such as avoiding mortgages and maintaining strict cost controls, support their capacity to sell at competitive prices, reinforcing the strategic application of TVM to sustain profitability in a highly competitive environment.

In conclusion, Boch Automotive exemplifies the integration of the time value of money in its daily operations and strategic decisions. By managing inventory turnover efficiently, leveraging external financing, and providing flexible payment options, the dealership maximizes cash flow and minimizes depreciation losses. These practices underscore the critical role of TVM in supporting sustainable growth, financial health, and competitive advantage in the automotive industry.

References

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• Boch Automotive Annual Report (2022). Internal corporate document.
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