Reference no: EM132621170

Question - SVP has annual sales of $85 million of which 85% were on credit. SVP has a 20% gross margin on its sales and credit purchases are 90% of cost of sales. SVP's normal working capital investment is:

Inventory days: 100 days Receivable days: 70 days Payables days: 80 days

The industry averages for SVP's industry are: Inventory - 90 days; Receivables - 60 days; and Payables - 90 days.

(a) Calculate SVP's overall investment in working capital.

(b) What is the length of SVP's operating cycle?

(c) What is the length of SVP's cash conversion cycle?

(d) Explain the significance of the length of the cash conversion cycle. Why is working capital management important?

(e) If SVP is financing its working capital investment through borrowings at 7% per annum, determine the annual interest savings if SVP was able to improve its working capital management to match industry averages.

(f) SVP is considering the introduction of a new credit policy including an early settlement discount for its customers. Under the proposed new policy, credit customers would get a 2% discount for settlement within 10 days. Customers not paying within 10 days would be required to pay within 60 days. QSVPbelieves that 25% of credit customers will take the discount and the rest will pay within 60 days. The cost of capital is 10%.

Determine if the proposed new policy is financially advantageous to SVP by comparing the existing cost of carrying its receivables with the new cost including the cost of the early settlement discount.