A firm 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
A) $50,000.
B) $200,000.
C) $ 6,000.
D) $216,000.

Question

Quizplus · Accepted Answer

The reduction in the cash conversion cycle from 60 days to 50 days is a 10-day reduction. The daily operating outlay is $1,800,000 / 365 = $4,931.51. The savings from reducing the cycle by 10 days is 10 * $4,931.51 = $49,315.07. The annual savings from financing costs is 12% of this amount, which is approximately $5,917.81, rounded to $6,000.

A Firm Has Annual Operating Outlays of $1,800,000 and a Cash