The annual savings of the firm will be $39,452
How to calculate annual savings?
Cash conversion cycle = 60 days
Annual outlays = $12 million
Cost of financing = 12%
Firm reduces average age of inventory by 10 days,
Annual savings can be calculated by the formula given below:
Annual savings = Annual outlay x Cost of financing x [tex]\frac{Average inventory period}{No. of days in a year}[/tex]
= $ 12, 000, 000 x 12% x [tex]\frac{10}{365}[/tex]
= $ 39, 452 (approximately).
Therefore, the annual savings of the firm will be $39,452.
What are annual outlay, cost of financing, cash conversion cycle and average age of inventory?
- Annual outlay includes all yearly maintenance, operation, and depreciation costs, as well as necessary depreciation costs other than capital cost instalments, incurred in connection with regulating or storage works, plus interest on the capital cost.
- The financing cost (FC), also referred to as the cost of finances (COF), is the cost of borrowing money to construct or purchase assets, including interest and other charges. This can include the cost of financing a mortgage on a home, financing a car loan via a bank, or financing a student loan.
- Cash conversion cycle is the time it takes for a business to convert its inventory investments into cash.
- The average age of inventory is the number of days it takes a company to sell off its inventory (60 to 90 days is good).
To know more about Cash conversion cycle, check out:
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