Saraswati Engineering Company is considering its working capital investment for the next year. Estimated fixed assets and current liabilities for the next year are ₹2.60 crore and ₹2.34 crore respectively. Sales and prof

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2015
Saraswati Engineering Company is considering its working capital investment for the next year. Estimated fixed assets and current liabilities for the next year are ₹2.60 crore and ₹2.34 crore respectively. Sales and profit before interest and taxes (PBIT) depend on investment in current assets - particularly inventories and book debts. The company is examining the following alternative working capital policies: Working capital policy Investment in current assets (in crore) Estimated sales (in crore) PBIT (in crore) Conservative 4.50 12.30 1.23 Moderate 3.90 11.50 1.15 Aggressive 2.60 10.00 1.00 You are required to calculate the rate of return on total assets for each policy.

Answer & Explanation:

(₹ in crore) Working capital Investment Policies Conservative Moderate Aggressive Current assets 4.50 3.90 2.60 Fixed assets 2.60 2.60 2.60 Total assets (X) 7.10 6.50 5.20 Current liabilities 2.34 2.34 2.34 Forecasted sales 12.30 11.50 10.00 Expected PBIT (Y) 1.23 1.15 1.00 Rate of return (Y/X) 17.32% 17.69% 19.23%

Topics: Working Capital Management

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