Question

a one time transaction for sales of OMR 250,000, COGS associated with sales OMR 100,000, operating cycle 60 Days, account payable 12000, Discount rate (simple) 5.66%

1) What is NPV associated with the above transaction

2) With else constant, what level of payable will allow the firm to have a CCC of 0 Days?

3) Suppose your firm expects to receive a OMR 20,000 payment from a supplier in 25 days. Calculate the increase in the cash inflow’s present value if the cash inflow can be collected 5 days sooner. Assume an annual discount rate of 10% simple.

Answer 1

One time transaction for sales =OMR 250,000

COGS associated with sales OMR 100,000

Operating cycle= 60 days

Accounts payable= 12000

Discount rate (simple) = 5.66%

Present value of future cash flows = Future cash flows / (1+periodic rate of interest)

1) Number of periods for Cost of goods sold =COGS/ Accounts payable

=100,000/12,000 = 8.33 days

Number of periods for sales= 60days

Periodic interest rates for sales = 5.66 * (60/365) =0.935%

Periodic interest rates for Cost of goods sold = 5.66% * (8.33/365) = 0.129%

Present value of sales = 250,000 / (1+0.00935) = 247,684.94

Present value of Cost of goods sold= 100,000 / (1+0.00129) = 99,870.87

Net present value:

= Present value of sales - Present value of Cost of goods sold

= 247,684.94 - 99,870.87 = 147,814.07

2) Cash conversion cycle calculation= operating cycle - payable cycle

0 days= 60 days -payable days

Payable days = 60 days -0

Payable days = 60

Cost of goods sold = 100,000 constant

0 days = 100,000 / 60 days = 1,666.67

3) Discount rate = 10%

Interest rates-Periodic for 20 days = 10% (20/365) = 0.549%

Interest rates-Periodic for 25 days = 10% (25/365) = 0.687%

Present value of the amount of 20,000 for 20 days = 20,000/ (1+0.00549) = 19,890.73

Present value of the amount of 20,000 for 25 days = 20,000 / (1+0.00687) = 19,863.50

=19,890.73 - 19,863.50 = 27.23

Thus increase in the cash inflow’s present value if the cash inflow can be collected 5 days sooner will be 27.23