Question

Conduct a comparative analysis of the capital budgeting process for new projects versus replacement decisions. The objective is to maximize shareholder wealth.

Question: Explain how the cash conversion cycle is determined, how the cash budget is constructed, and how each is used in working capital management.

Answer 1

Cash conversion cycle is a cycle in which ability of firm is determined in order to get its various Assets and liabilities converted into cash.

It is determinant of receivable cycles and payable cycles and increase in payable cycle means that it is good for the company because the payment from the company are delayed to the creditors and it will have cash in its books of accounts.

where cash receivables of the company are delayed it means that the cash collection of company is slow and it would mean that the company is not having adequate collection process.

This will also mean that the lower the cash conversion cycle,the better it is for the company, because it will mean that the companies having ample amount of liquidity in its hands and it is having adequate cash in its books of accounts.

Cash budget is prepared after ascertainment of cash flows of future and it is used for management of working capital because management of working capital is is mostly dealt with management of current liabilities and current asset and the company who have a better working capital means that the company will be highly liquid