CASH CONVERSION CYCLE

Camp Manufacturing turns over its inventory eight times each year, has an average payment period of 35 days, and
a. Calculate the firm’s operating cycle and cash conversion cycle.
b. Calculate the firm’s daily cash operating expenditure.
c. How much in resources must be invested to support its cash conversion cycle?

a. Ave. Age of Invent.= # of working days/Inventory Turnover

= 365 / 8
= 46 days

Operating cycle= Ave. Age of Inv. + Ave. Age of Trade receivables

= 46 + 60
= 106 days

CCC= Operating cycle - Average age of trade payables

= 106 - 35
= 71 days

b. Annual sales 3,500,000

Divide: # of working days 365
Daily cash operating expenditure 9589.041096

c. Daily cash operating expenditure 9589.041096

Multiply:Cash conversion cycle 71
Resources 680821.9178

OPTIMUM CASH BALANCE

The cash requirements of Genie Company are estimated to be P500,000 per annum, spread evenly throughout the
Required:
1.Calculate the optimum amount of cash to be transferred.
2.Determine the number of transactions per annum.
3.How much is the total cost associated with the optimum cash balance?

1 ECQ= √ 2 x conversion cost x annual demand for cash/opportunity cost ( in percentag

= √ 2 x 150 x 500,000/0.12
= √ P 1,250,000,000
= P 35,355.34

2 Number of transactionTotal cash outlay/Optimal cash balance

= 500,000/35,355.54
= 14 transactions

3 Conversion cost= ( P 500,000 / P 35,355 ) x P 150

= P 2,121.34

Opportunity cost= ( P 35,355 / 2 ) x 0.12

= P 2,121.3

Total cost= Conversion cost + Opportunity cost

= P 2,121.34 + P 2,121.3
= P 4,242.64
nt period of 35 days, and has an average collection period of 60 days. The firm’s annual sales are P3.5 million. Assume there is

ad evenly throughout the year. The money on deposit earns 12%. The costs to purchase and sell marketable instruments is P15
tunity cost ( in percentage)
3.5 million. Assume there is no difference in the investment per peso of sales in inventory, receivables, and payables and that th

ketable instruments is P150 per transaction.

s, and payables and that there is a 365-day year.
COLLECTION AND DISBURSEMENT FLOAT
Float
Simon Corporation has daily cash receipts of P65,000. A recent analysis of its collections indicated that customers’ p
a. How much collection float (in days) does the firm currently have?
b. If the firm’s opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee of P16,50

a. b.
Collection float=Mail float + Processing float +Clearing float
Collection float=2.5 + 1.5 + 3=7 days

Lockbox system
Eagle Industries feels that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit s
a. What amount of cash will be made available for other uses under the lockbox system?
b. What net benefit (cost) will the firm realize if it adopts the lockbox system?
c. Should it adopt the proposed lockbox system?

a. Annual credit sales 3,240,000

Divide:Number of days in year 365
Total 8876.712329
Multiply:Accounts Receivable Collection Period 3
Cash available for other use 26630.13699

b. Net Benefit = 26,630.14 x 0.15

Net Benefit=P 3,994.52

c. No,the cost of the lockbox system which is P 9,000 per year is greater than the net benefit of Eagle Indu
ndicated that customers’ payments were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5

y an annual fee of P16,500 to reduce collection float by 3 days?

Opportunity cost = 65,000 x 3 x 0.11 $21,450.00

Opportunity cost-Annual fee=21,450 -16,500=4,950

It would be advisable because the savings exceed the cost.

period by 3 days. Credit sales are P3,240,000 per year, billed on a continuous basis. The firm has other equally risky investmen

e net benefit of Eagle Industries which will result in a net decrese of income.
nts are processed in 1.5 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banki

er equally risky investments that earn a return of 15%. The cost of the lockbox system is P9,000 per year. Assume a 365-day ye
receipts to clear the banking system.

year. Assume a 365-day year.