Ithaca Iron has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days.If the firm currently pays 12 percent for negotiated financing and reduces its cash conversion cycle to 50 days, the annual savings is closest to
A)$60,000.
B)$10,000.
C)$6,000.
D)$16,000.
E)none of above are correct

Question

Quizplus · Accepted Answer

Reducing the cash conversion cycle by 10 days saves interest on the operating outlays for those 10 days. The daily operating outlay is $1,800,000 / 365 = $4,931.51. The savings in interest is $4,931.51 * 10 * 0.12 = $5,917.81, which is closest to $6,000.

Ithaca Iron Has Annual Operating Outlays of $1,800,000 and a Cash