Current Asset Management Solutions 1

Current Asset Management Solutions 1 - Old CCC (ignore...

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Old Exam Questions - Current Asset Management - Solutions Page 1 of 21 Pages Current Asset Management - Solutions 1. Your company has annual sales of $36,500,000 ($100,000 a day on a 365-day basis). On average, the company has $12,000,000 in inventory and $8,000,000 in accounts receivable. The company is looking for ways to shorten its cash conversion cycle (calculated on a 365-day basis). The CFO has proposed new policies that would result in a 20 percent reduction in both average inventories and accounts receivables. The company anticipates that these policies will also reduce sales by 10 percent. Accounts payable will remain unchanged. What effect would these policies have on the company's cash conversion cycle? A. 40 days shorter * B. 22 days shorter C. 13 days shorterD. 22 days longer E. 40 days longer CCP = ICP + RCP - PDP For this problem we are only interested in the change in the CCC. We may therefore ignore the Payables Deferral Period since it is assumed to remain unchanged.
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Unformatted text preview: Old CCC (ignore payables) = $12,000,000/$100,000 + $8,000,000/$100,000 = 120 + 80 = 200 days. New CCC = $9,600,000/$90,000 + $6,400,000/$90,000 = 106.67 + 71.11 = 177.78 days. Change in CCC = New CCC Old CCC = 177.78 - 200 = 22 days shorter 2. Your company currently fills mail orders from all over the U.S. and receipts come in to headquarters in Gainesville, Florida. The firm's average accounts receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annual interest. Your company is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system? A. $500,000 B. $ 30,000 C. $ 60,000 D. $ 55,000 * E. $ 40,000 Current A/R = $2,500,000 New A/R with 20% reduction: $2,500,000 (0.20) * ($2,500,000) = $2,000,000 Net reduction in A/R = $500,000...
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