Chapter 14

Chapter 14
Working Capital and Current Assets Management

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Solutions to Problems

P14-1. LG 2: Cash Conversion Cycle
Basic
= Average age of inventories
+ Average collection period
= 90 days + 60 days
= 150 days

(a) Operating cycle (OC)

(b) Cash Conversion Cycle (CCC) = Operating cycle − Average payment period
= 150 days − 30 days
= 120 days
= (total annual outlays ÷ 365 days) × CCC
= [$30,000,000 ÷ 365] × 120
= $9,863,013.70
(d) Shortening either the average age of inventory or the average collection period, lengthening the average payment period, or a combination of these can reduce the cash conversion cycle.

(c) Resources needed

P14-2. LG 2: Changing Cash Conversion Cycle
Intermediate
(a) AAI
Operating Cycle

=
=
=
=

365 days ÷ 8 times inventory = 46 days
AAl + ACP
46 days + 60 days
106 days

Cash Conversion Cycle = OC − APP
= 106 days − 35 days = 71 days
(b) Daily Cash Operating Expenditure = Total outlays ÷ 365 days
= $3,500,000 ÷ 365
= $9,589
Resources needed

= Daily Expenditure × CCC
= $9,589 × 71
= $680,819

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Part 5

Short-Term Financial Decisions

= (Daily expenditure × reduction in CC)
× financing rate
= ($9,589 × 20) × 0.14
= $26,849

(c) Additional profit

P14-3. LG 2: Multiple Changes in Cash Conversion Cycle
Intermediate
(a) AAI
OC

=
=
=
=

365 ÷ 6 times inventory = 61 days
AAI + ACP
61 days + 45 days
106 days

CCC

= OC − APP
= 106 days − 30 days
= 76 days

Daily Financing

= $3,000,000 ÷ 365
= $8,219

Resources needed = Daily financing × CCC
= $8,219 × 76
= $624,644
= 55 days + 35 days
= 90 days

(b) OC
CCC

= 90 days − 40 days
= 50 days

Resources needed = $8,219 × 50
= $410,950
(c) Additional profit = (Daily expenditure × reduction in CCC)
× financing rate
= ($8,219 × 25) × 0.13
= $26,712
(d) Reject the proposed techniques because costs ($35,000) exceed savings ($26,712).
P14-4. LG 2: Aggressive versus Conservative Seasonal Funding Strategy
Intermediate
(a)
Month

Total Funds
Requirements

Permanent
Requirements

Seasonal
Requirements