Question

Working capital question

Annual sales in $9000000 Gross

profit margin 15%

purchase equal to 90% of cost of goods sold Terms extended by company to customers are wire in advance (COD)

Company turns over its inventory 5x per year Terms extended by suppliers are 1/10/45; permit payment in 75

Company's cost of capital is 7%

Calculate the Investment amount required for working capital needs.

So far i have solved this, but I can't figure out the rest

Area	Avg Daily	Days invested	Work capital needed
Inventory	29,588	73	2,159,924
AR	32876	?	?
AP	26,629	(75)	(1,997,175)

Please help.

Answer 1

		Area	Avg Daily	Days invested	Work capital needed
	A	Inventory	29,588	73	2,159,924
	B	AR	32876	0	$0
	C	AP	26,629	-75	-1,997,175
	D=A+B+C	Working Capital Required
			Sales Terms=COD	(Cash On Delivery)
			Accounts Receivable=Zero
			There apprearsto be some errors in your calculation.
			Calculation of Working capital need given below:
			Annual
		Sales	$9,000,000
		Coat of goods sold	$7,650,000	(1-0.15)*9000000
		Purchase	$6,885,000	(0.9*7650000)
		Inventory Required	$1,530,000	(7650000/5)
		Payment term for purchase	1% discount if payment made in 10days
			Full Payment in 45days
			permit payment in 75 days
		For Purchaseof $100	Pay $99 in 10days
			or pay $100 in 75days
		Saving of $1 if paid 65 days in dvance
		Cost of Capital =7%			0.012465753
		$99 in 65 days at 7%=	100.2341096	(99*(1+(0.07*(65/365)))
		It is greater than $100
		Hence, it will be economical not to take discount and pay in 75 days
		Accounts Payable	(6885000/365)*75	$                                     1,414,726
		Accounts Receivable		$0
		Working Capital Need	$115,274	(1530000-1414726)