Garrett Industries turns over its inventory six times each year; it has an average collection period of 35 days and an average payment period of 30 days. The firm’s annual sales are $ 5 million, costs of goods sold $ 1 million while other operating costs excluding depreciation $ 2 million. Based on the data find the firm’s cash conversion cycle and resource investment requirement if it makes the following changes simultaneously: (1) Shortens the average age of inventory by 5 days. (2) Speeds the collection of accounts receivable by an average of 10 days. (3) Extends the average payment period by 10 days. If the firm pays 13% WACC, by how much, if anything, could it reduce annual costs of working capital financing?
Garrett Industries turns over its inventory six times each year; it has an average collection period of 35 days and an average payment period of 30 days. The firm’s annual sales are $ 5 million, costs of goods sold $ 1 million while other operating costs excluding depreciation $ 2 million. Based on the data find the firm’s cash conversion cycle and resource investment requirement if it makes the following changes simultaneously: (1) Shortens the average age of inventory by 5 days. (2) Speeds the collection of accounts receivable by an average of 10 days. (3) Extends the average payment period by 10 days. If the firm pays 13% WACC, by how much, if anything, could it reduce annual costs of working capital financing?
Chapter16: Supply Chains And Working Capital Management
Section: Chapter Questions
Problem 11P
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- Garrett Industries turns over its inventory six times each year; it has an average collection period of 35 days and an average payment period of 30 days. The firm’s annual sales are $ 5 million, costs of goods sold $ 1 million while other operating costs excluding depreciation $ 2 million.
Based on the data find the firm’s cash conversion cycle and resource investment requirement if it makes the following changes simultaneously:
(1) Shortens the average age of inventory by 5 days.
(2) Speeds the collection of accounts receivable by an average of 10 days.
(3) Extends the average payment period by 10 days.
If the firm pays 13% WACC, by how much, if anything, could it reduce annual costs of working capital financing?
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