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Question - You are the CFO of a company which is considering whether it's worth while to speed up collections of account receivables to reduce the cash conversion cycle. This is the current situation in your company:
Expects annual sales= 1 billion
80% of these sales are received immediately and the rest 20% after one year.
You are considering whether it's worth to demand quicker payment from customers. You estimated that you can collect 90% of annual sales immediately if you lower prices by a certain amount. As a result of these discounts, your expected annual sales will decrease by 2% to 980 million a year.
To solve thus question, assume that there are no costs and no taxes. Thus, sales are equal to profits. In addition, there are no receivables to collect at the beginning of the first year. (In the current situation 80% is collected immediately. What are the cash flows at the beginning and ending of first year?
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