Assume 360 days year for computation working capital

This preview shows page 27 - 32 out of 32 pages.

Assume 360 days / year for computation
Image of page 27
Working capital Example CCC = AAI + ACP APP = 60 + 40 35 = 65 days Resources invested in CCC : Inventory = $10,000,000 x 0.75 x (60/360) = $ 1,250,000 + Accounts receivable = $10,000,000 x (40/360) = $ 1,111,111 - Accounts payable = $10,000,000 x 0.75 x 0.65 x (35/360) = $ 473,958 Total = $ 1,887,153 A 5 day reduction in the average collection period would reduce the resources invested in CCC by $ 138,889 { $10 m x (5/360)}
Image of page 28
Permanent Funding requirement Example Nicholson Co. holds, on average, $50,000 in cash and marketable securities, $1,250,000 in inventory, and $750,000 in accounts receivable. Nicholson’s business is very stable over time, so its operating assets can be viewed as permanent. In addition Nicholson’s accounts payable of $ 425,000 are stable over time. What is the permanent funding requirement ? The permanent investment in operating assets is $1,625,000 ( $50,000 + $1,250,000 + $750,000 - $425,000). That amount would equal its permanent funding requirement .
Image of page 29
Seasonal Funding requirement Example Semper Pump Co., which produces bicycle pumps has seasonal sales with its peak sales driven by summertime purchase of bicycle pumps. Semper holds, at minimum, $25,000 in cash and marketable securities, $100,000 in inventory, and $60,000 in accounts receivable. At peak times, inventory increases to $750,000 and its accounts receivable increase to $400,000. To capture production efficiency, Semper produces pumps at a constant rate throughout the year. Thus accounts payable remain at $50,000 throughout the year. What is the permanent funding requirement & peak funding requirement? Permanent funding requirement for its minimum level of operating assets is $135,000 ( $25,000 + $100,000 + $60,000 - $50,000) Peak seasonal funding requirement (in excess of permanent need) is $990,000 (25,000 + $750,000 + $400,000 - $50,000 - $135,000).
Image of page 30
Computing cash requirement for working capital Estimate the cash cost of various current assets required by the firm Deduct the current liabilities from the cash cost of current assets
Image of page 31
Non cash Working Capital Non cash WC = Non cash current assets Non-interest bearing current liabilities
Image of page 32

You've reached the end of your free preview.

Want to read all 32 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors