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Assignment 2 - Midterm Period

The document discusses two examples of firms analyzing cash management performance. The first example calculates a firm's cash conversion cycle, operating cycle, and annual savings from reducing the operating cycle by 15 days. The second example calculates a firm's cash conversion cycle before and after implementing a lockbox system to reduce accounts receivable collection time, and the resulting annual savings in financing costs.

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Joelyn Fajiculay
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18 views1 page

Assignment 2 - Midterm Period

The document discusses two examples of firms analyzing cash management performance. The first example calculates a firm's cash conversion cycle, operating cycle, and annual savings from reducing the operating cycle by 15 days. The second example calculates a firm's cash conversion cycle before and after implementing a lockbox system to reduce accounts receivable collection time, and the resulting annual savings in financing costs.

Uploaded by

Joelyn Fajiculay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. Minny Fishing Products is analyzing the performance of its cash management.

On the average,
the firm holds inventory 65 days, pays its suppliers in 35 days, and collects its receivables in 15
days. The firm has a current annual outlay of P1,960,000 on operating cycle investments. Minny
currently pays 10 percent for its negotiated financing. (Assume a 360-day year.)

a. Calculate the firm’s cash conversion cycle.

CCC = 65 + 15 – 35 = 45

b. Calculate the firm’s operating cycle.

OC = 65 + 15 = 80

c. Calculate the daily expenditure and the firm’s annual savings if the operating cycle is
reduced by 15 days.

Daily expenditure = 1,960,000/360 = 5,444.44


Annual savings = 5,444.44  15  0.10 = 8,167

2. A firm has arranged for a lockbox system to reduce collection time of accounts receivable.
Currently the firm has an average collection period of 43 days, an average age of inventory of 50
days, and an average payment period of 10 days. The lockbox system will reduce the average
collection period by three days by reducing processing, mail, and clearing float. The firm has
total annual outlays of P15,000,000 and currently pays 9 percent for its negotiated financing.

a. Calculate the cash conversion cycle before and after the lockbox system.

CCC before lockbox = 43 + 50 – 10 = 83


CCC after lockbox = 40 + 50 – 10 = 80

b. Calculate the savings in financing costs from the lockbox system.

15,000,000/360  41,666.67 per day  3  0.09  11,250

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