Following information has been available from the finance department of the Royal Industries: (1) The average receivable period is 45 days, while the average payable period is 30 days. (2) The average inventory holding p

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2019
Following information has been available from the finance department of the Royal Industries: (1) The average receivable period is 45 days, while the average payable period is 30 days. (2) The average inventory holding period is 75 days. (3) The operating cash expenses of Royal Industries are ₹120 lakh annually at a constant rate. (4) Return on investment is 15%. (5) Number of days in a year are 360. From the above information, compute: (c) The savings in terms of interest cost if the management successfully reduces the inventory holding period by 30 days.

Answer & Explanation:

(c) Savings in terms of interest cost by reducing inventory holding period by 30 days Original Inventory Holding Period = 75 days Reduced Inventory Holding Period = 75 days - 30 days = 45 days Reduction in Inventory Holding Period = 30 days This reduction in inventory holding period will lead to a reduction in the investment in inventory. Reduction in Investment = (Operating Cash Expenses / 360 days) * Reduction in Inventory Holding Period Reduction in Investment = (₹120 Lakhs / 360) * 30 Reduction in Investment = ₹10 Lakhs Savings in Interest Cost = Return on Investment * Reduction in Investment Savings in Interest Cost = 15% of ₹10 Lakhs Savings in Interest Cost = ₹1.50 Lakhs

Topics: Working Capital Management

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