STATEMENT SHOWING EVALUATION OF WORKING CAPITAL POLICY

Particulars Conservative Moderate Aggressive

Current Assets 11.475 9.945 6.63
Curent liabilities 5.967 5.967 5.967
Current ratio 1.92 1.67 1.11
Net Working Capital 5.508 3.978 0.663

EBIT 3.1365 2.9325 2.55

Fixed Assets 6.63 6.63 6.63
Total Assets (FA + CA) 18.105 16.575 13.26
Return on Assets 17.32% 17.69% 19.23%
(EBIT / Total Assets)

Current Assets / Fixed Assets 1.73 1.50 1.00

STATEMENT SHOWING EVALUATION OF WORKING CAPITAL POLICY
Particulars Conservative Moderate Aggressive
Sales 3,000,000 3,000,000 3,000,000
Current Assets 1,800,000 1,500,000 1,200,000
=C4*0.6 =D4*0.5 =E4*0.4
Fixed Assets 600000 600000 600000
Total Assets 2,400,000 2,100,000 1,800,000
Total Debt (50% * Total Assets) 1,200,000 1,050,000 900,000
Equity (Asset - Debt) 1,200,000 1,050,000 900,000

EBIT (15% of Sales) 450,000 450,000 450,000

Less: Interest (10% of Debt) 120,000 105,000 90,000
EBT 330,000 345,000 360,000
Less: Income tax @40% 132,000 138,000 144,000
EAT 198,000 207,000 216,000

Return on Equity 16.50% 19.71% 24.00%

(EAT/ Equity *100)
 VanderheidHerrenhouse Publishing VanderheidHerrenhouse Publishing
EBIT 30,000 30,000 EBIT 30,000 30,000
Less: Interest Less: Interest
Current liabilities @10% 2,000 8,000 Current liabilities @20% 4,000 16,000
Long-term debt @13% 10,400 2,600 Long-term debt @13% 10,400 2,600
EBT 17,600 19,400 EBT 15,600 11,400
Less: Tax @40% 7,040 7,760 Less: Tax @40% 6,240 4,560
EAT 10,560 11,640 EAT 9,360 6,840
Equity 100,000 100,000 Equity 100,000 100,000
(Common stock + Res) (Common stock + Res)
ROE 10.56% 11.64% ROE 9.36% 6.84%

Decrease in
profitability
Vander 1.20% lower risk
Heren 4.80% Higher risk
Herrenhouse Publishing
Prestopino Corporation

Inventory holding period 22 Days Inventory holding period 22

Debtors collection period 40 Days Debtors collection period 40
Gross Operating Cycle 62 Days Gross Operating Cycle 62
Less: Creditors payment period -30 Days Less: Creditors payment period -35
Net operating cycle 32 Days Net operating cycle 27

Cost per unit 6

No of units per day 1500
Cost per day 9000
x No of day 32
Required working capital 288000

SITUATION NO.04
Inventory holding period 20 Days Cost per unit 7
Debtors collection period 40 Days No of units per day 1800
Gross Operating Cycle 60 Days Cost per day 12600
Less: Creditors payment period -30 Days x No of day 30
Net operating cycle 30 Days Required working capital 378000
Days
Days
Days
Days
Days
 Statement showing estimated working capital
CURRENT ASSETS
1) Stock of Raw Material
( Raw Material Consumed pa * RM Holding period /365)
2) Stock of Work in Progress
Material (100% * RM Consumed pa * WIP holding period /365
Labour (50% * Direct Labour pa * WIP holding period /365)
Overheads (50% * Overheads * WIP holding period /365)
3) Stock of Finished Goods
Cost of Production * FG Holding period period /365
4) Debtors (At selling price)
(Credit Sales * Debtors collection period / 365)
(cost of Credit Sales * Debtors collection period / 365)
(Cash cost of Credit Sales * Debtors collection period / 365)
5) Prepaid expenses
(Total Expenses pa * Prepayment period /365)
6) Cash
Total Current Assets / Gross working capital
Less: Current Liabilities
1) Creditors
(Credit purchases of RM * Creditors payment period /365)
2) Outstanding Expenses
(Total Expenses pa * outstanding period /365)
3) Bank overdraft
Net Working Capital (CA -CL)

eg RM Consumed pu 5
Noi of units 200000
RM Holding period 45 day
RM Consumed pa 1000000
RM Consumed/ day 2739.726
Stock of RM 123287.7
Cost Sheet ( 96,000 units)
CPU Total Statement showing estimated working capital
Raw Material 30 2,880,000 CURRENT ASSETS
Direct labour 7.5 720,000 1) Stock of Raw Material 240000
Direct Exp 5 480,000 (28,80,000 *1/12)
Total Cost 42.5 4,080,000 2) Stock of Work in Progress
Add: Profit 7.5 720,000 Material (100% *28,80,000 *1 /12) 240000
Sales 50 4,800,000 Labour ( 50% *7,20,000 *1/12) 30000
Direct exp (50% * 4,80,000 *1/12) 20000 290000
No of units = 96000 3) Stock of Finished Goods 1020000
(40,80,000 * 3/12)
4) Debtors (At Selling price)
Normal Abnormal a) (86400 units *50 * 2/12) 720000
86400 9600 b) ( 9600 units * 55 * 2/12) 88000 808000
Total Current Assets (Exclding Cash) 2358000
Less: Current Liabilities
1) Creditors 360000
(28,80,000 *1.5 /12 )
2) Outstanding Wages 30000
(7,20,000 *0.5 /12)
3) Outstanding Expenses 20000 410000
(4,80,000 *0.5 /12)
CA - CL (Excluding Cash) 90 1948000
Add: Cash & Bank Balance 10 216444.4
Working capital 100 2164444
 In the books of MNO Ltd
COST SHEET
Particulars Existing (100%) - 30,000 units Projected (50%) - 15,000 units
Total CPU Total CPU
Direct Materials 75,000,000 2,500 33,750,000 2,250
Direct Labour 30,000,000 1,000 12,000,000 800
Direct exp(Balance) 15,000,000 500 8,250,000 550
Total Cost 120,000,000 4,000 54,000,000 3,600 80
Add: Profit @20% 30,000,000 1,000 13,500,000 900 20
Sales 150,000,000 5,000 67,500,000 4,500 100

Statement showing estimated working capital

CURRENT ASSETS
1) Stock of Raw Material 2,812,500
(3,37,50,000 /12*1)
2) Stock of Work in Progress
Material (100% *3,37,50,000 *1 /12) 2,812,500
Labour ( 50% *120,00,000 *1/12) 500,000
Direct exp (50% * 82,50,000 *1/12) 343,750 3,656,250
3) Stock of Finished Goods 9,000,000
(540,00,000 * 2/12)
4) Debtors (At Selling price) 5,625,000
(675,00,000 *1/12)
5) Cash & Bank balance 3000000
Total Current Assets 24,093,750
Less: Current Liabilities
1) Creditors 5,625,000
(3,37,50,000 /12*2)
2) Outstanding Wages 1,000,000
(120,00,000 *1 /12)
3) Outstanding Expenses 687,500
(82,50,000 * 1 /12)
Total Current Liabilities 7,312,500
CA - CL 16,781,250
Add: Margin of Safety @10% 1,678,125
Working capital 18,459,375
 Total CPU
Direct Material 7,500,000 125
Fixed Direct Labour 900,000 15
Variable direct labour 2,400,000 40
Fixed Direct Expenses 660,000 11
Variable direct Expenses 540,000 9
Total Cost 12,000,000 200
Add: Profit @25% on cost 3,000,000 50
Sales / MRP 15,000,000 250

Wholesale Sales @25% 3,750,000

Less: Quantity discount 375,000
Selling price to wholeseller 3,375,000

40% - Bills - 2 Months 60% - Trade Debtors - 1 month

Bills Rec = 33,75,000 * 40% * 2/12 Trade Drs= 33,75,000 * 60% * 1/12
225,000.0 168,750.0

Retail Sales @75% 11,250,000

CASH SALE (50%) Credit sales to retailers 5,625,000.0

Debtors = Nil Credit Period = 1 month
Retail Debtors = 56,25,000*1/12
468,750

Statement showing estimated working capital

CURRENT ASSETS
1) Stock of Raw Material
(75,00,000 /12*1.5) 937,500
2) Stock of Work in Progress
Material (100% 75,00,000 /12*1) 625,000
Fixed Direct Labour ( 100% *9,00,000 *1/12) 75,000
Variable Direct Labour ( 40% *24,00,000 *1/12) 80,000
Fixed Direct exp (100% * 6,60,000 *1/12) 55,000
Variable Direct exp (40% * 5,40,000 *1/12) 18,000 853,000
3) Stock of Finished Goods 1,000,000
(120,00,000 * 1/12)
4) Debtors -
a) Wholesale Bills Rec 225,000
b) Wholesale Trade Debtors 168,750
c) Retail Debtors 468,750 862,500.0
5) Prepaid Fixed Wages
(9,00,000 *0.5/12) 37,500.0
6) Prepaid Fixed Expenses
(6,60,000 *1/12) 55000
Total Current Assets (Excluding Cash) 3,745,500
Less: Current Liabilities
1) Creditors
a) Bills Payable (75,00,000 *25% /12*2) 312500
b) Trade Creditors (75,00,000*75% * 1.5/12) 703125 1015625
2) Outstanding variable Wages 200,000
(24,00,000 *1 /12)
3) Outstanding variable Expenses 22,500
(5,40,000 * 0.5 /12)
Total Current Liabilities 1,238,125
CA - CL (Excluding Cash) 85 2,507,375
Add: Cash & Bank Balance 15 442,478
Working capital 100 2,949,853
s - 1 month
,000 * 60% * 1/12
 COST SHEET
Particulars Projected - 10,00,000 units
Total CPU
Direct Materials 3,200,000 3.20
Direct Labour 1,600,000 1.60
Direct exp 1,600,000 1.60
Total Cost 6,400,000 6.40
Add: Profit 1,600,000 1.60
Sales 8,000,000 8.00

Statement showing estimated working capital

CURRENT ASSETS
1) Stock of Raw Material 800,000
(32,00,000 /12*3)
2) Stock of Work in Progress
Material (100% *32,00,000 *2 /12) 533,333
Labour ( 50% *16,00,000 *2/12) 133,333
Direct exp (50% * 16,00,000 *2/12) 133,333 800,000
3) Stock of Finished Goods 1600000
(64,00,000 * 3/12)
4) Debtors (At Selling price) 2,666,667
(80,00,000 *4/12)
5) Cash & Bank balance 200000
Total Current Assets 6,066,667
Less: Current Liabilities
1) Creditors 800,000
(32,00,000 /12*3)
2) Outstanding Wages 66,667
(16,00,000 *0.5 /12)
3) Outstanding Expenses 66,667
(16,00,000 *0.5 /12)
Total Current Liabilities 933,333
NET WORKING CAPITAL 5,133,333
=8*40%
=8*20%
=8*20%
=SUM(D5:D7)
=8*20%

Estimated Balance sheet

Share capital
Equity share capital 5000000
Preference share capital 1500000 6500000
Reserves >

Current liabilities 933,333

Total Liabilities
Fixed Assets 3066667
Current Assets 6,066,667
Total Assets 9133333.6667
 Sales = 2,400,000
GP = 480,000 =D2*20%
Cost = 1,920,000

Cash Cost of Production Depreciation

Material 600,000 i.e. 19,20,000 -16,80,000
Wages 480,000 240,000
Mfg Exp 600,000
1,680,000

Statement showing estimated working capital (Cash Cost Basis)

CURRENT ASSETS
1) Stock of Raw Material 50,000
(6,00,000 /12*1)
2) Stock of Finished Goods 140000 (At cash cost of production)
(16,80,000 * 1/12)
3) Debtors (At cash cost of production) 280000
(16,80,000 * 2/12)
4) Cash & Bank balance 80000
5) Prepaid sales promoition exp 18750
(75,000*3/12)
Total Current Assets 568,750
Less: Current Liabilities
1) Creditors 100,000
(6,00,000 /12*2)
2) Outstanding Wages 20,000
(4,80,000 *0.5 /12)
3) Outstanding Manufacturing Expenses 50,000
(6,00,000 *1/12)
4) Outstanding Admin Expenses 12,500
(1,50,000 *1/12)
Total Current Liabilities 182,500
CA - CL = 386,250
Add:Contingency Funds/Margin of Safety 38,625
NET WORKING CAPITAL 424,875
Annual demand 5000
Ordering cost per order 60
Price per unit 100
Carrying cost pa 15%
Carrying cost pu pa 15

EOQ = SQRT(2*Annual demand*Ordering cost per order/ Carrying cost pu pa)

EOQ = SQRT(2*5000*60/15) = 200
Order receiving & handling costs 3 per order
Trucking cost 12 per order
Total ordering cost per order 15 per order

Interest pu pa 0.06
Obsolesence cost pu pa 0.004
Storage cost pu pa (1000/50000) 0.02
Total carrying cost pu pa 0.084

EOQ = SQRT(2*Annual demand*Ordering cost per order/ Carrying cost pu pa)

EOQ= SQRT(2*50,000*15/0.084) = 4225.771
i.e. 4,226 units
 Annual demand 36000
Ordering cost per order 25
Cost per unit 1
Carrying cost pa 20%
Carrying cost pu pa 0.2

EOQ = SQRT(2*Annual demand*Ordering cost per order/ Carrying cost pu pa)

EOQ = SQRT(2*36000*25/0.2) = 3000

Calculation of Cost under existing policy Calculation of Cost under EOQ

(A) No of Orders 6 (A) Orderring Quantitry
Ordering cost per order 25 Annual Demand
Total ordering cost pa 150 =C12*C13 No of orders
Ordering cost per order
(B) Annual demand 36000 Total ordering cost pa
No of Orders 6
Ordering Quantity 6000 =C16/C17 (B) Orderring Quantitry
Average Quantity 3000 =(0+6000)/2 Average quantity
Carrying cost pu pa 0.2 Carrying cost pu pa
Total Carrying cost pa 600 Total Carrying cost pa

('C) Total Cost (A+B) 750 ('C) Total Cost (A+B)

SAVING IN COST = 750-600= 150

 3000
36000
12 =J13/J12
25
300 =+J14*J15

3000
1500
0.2
300 =J19*J20

600 =+J16+J21
 Monthly Demand 1500
Annual demand 18000
Ordering cost per order 150
Price per unit 27
Carrying cost pa 20%
Carrying cost pu pa 5.4

EOQ = SQRT(2*Annual demand*Ordering cost per order/ Carrying cost pu pa)

EOQ = SQRT(2*18,000*150/5.4) = 1000

Calculation of Cost under EOQ Calculation of Cost of Suppliers Policy

(A) Orderring Quantitry 1000 (A) Orderring Quantitry 1200
Annual Demand 18000 Annual Demand 18000
No of orders 18 =E13/E12 No of orders 15 =K13/K12
Ordering cost per order 150 Ordering cost per order 150
Total ordering cost pa 2700 =+E14*E15 Total ordering cost pa 2250 =+K14*K15

(B) Orderring Quantitry 1000 (B) Orderring Quantitry 1200

Average quantity 500 Average quantity 600
Carrying cost pu pa 5.4 Carrying cost pu pa 5.292
Total Carrying cost pa 2700 =E19*E20 Total Carrying cost pa 3175.2 =K19*K20
('C) Saving in Purchase cost 9720 =27*18000*2%
('C) Total Cost (A+B) 5400 =+E16+E21 Total Cost -4294.8
27*18000*2%
Requirments per month 262500
Requirments pa 3150000
Transaction cost 25
Opportunity cost 7.50%

Optimum transaction size

=SQRT( 2* annual demand* Transaction cost / Opportuinituy costpa)
=sqrt(2*3150,000*25/0.075)
45,825.76 i.e. 45,826
Requirments per month 2,000,000
Requirments pa 24,000,000
Transaction cost 150
Opportunity cost 6.00%

Optimum transaction size

=SQRT( 2* annual demand* Transaction cost / Opportuinituy costpa)
=sqrt(2*240,00,000*150/0.06)
346,410.16 i.e. 3,46,411

Maximum Cash balance 346,411.00

Minimum Cash Balance 0
Average Cash Balance 173,206 =(C12+C13)/2
Opportunity cost @6% 10,392 =+C14*0.06

Requirments pa 24,000,000
Transaction amout 346,411.00
No of transactions 69.28 i.e. 70
Trnasaction cost per transaction 150
Total transaction cost 10500

Total Cost =10,392+ 10,500 = 20,892

 STATEMENT SHOWING CASH MANAGEMENT COSTS
Particulars I II III IV V
Annual Requirement 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Transaction Size 50,000 100,000 200,000 250,000 500,000
No of Transactions 20 10 5 4 2
(A) Transaction cost 20,000 10,000 5,000 4,000 2,000
@1000/- per transactin
Average Cash Balance 25,000 50,000 100,000 125,000 250,000
(B) Opportunity cost @5% 1,250 2,500 5,000 6,250 12,500
(avg cash bal* 5%)
Total Cost (A+B) 21,250 12,500 10,000 10,250 14,500

Optimum transaction size

=SQRT( 2* annual demand* Transaction cost / Opportuinituy costpa)
=sqrt(2*10,00,000*1000/0.05)
200,000.00
Transaction cost per transaction 20
Daily Variance of Cash flow 1440000
Interest rate per day 0.01%

1) Transaction cost per transaction * Variance of Cash flow

2) (Transaction cost per transaction * Variance of Cash flow)
Interest rate
3) 3/4 * (Transaction cost per transaction * Variance of Cash
Interest rate
4) SPREAD = Z =3* (M19^(1/3))

Minumum balance
Upper limit = Minumum balance + Spread =
Return point = Lower limit + Spread /3 =
of Cash flow 28800000=H12*H13
of Cash flow) 2.88E+11

ariance of Cash flow) 2.16E+11

18,000.00

1000
19000
7000
total collection in a month
No of days per month
Daily collection
No of days delayed
Collection float

Daily collection
No of days delayed
Collection float

Daily payment
Clearing time
Payment float
139000
30
4633.33
4
18533

29000
2 Net float = -58,000 + 68,000
58000 Net Float = 10,000

17000
4
68000
WN 1 Calculation of Cash receipt per day
Annual turnover 84 Crore
No of weeks in a year 50
Turnover per week 1.68
daily rate of receipts on Mondays and Tuesdays is twice that experienced on the other three days of the week
Let's assume that cash collection per day on last three days is x
Monday (2X) 4,800,000 =16800000*2/7
Tuesday (2X) 4,800,000 =16800000*2/7
Wednesday (X) 2,400,000 =16800000*1/7
Thursday (X) 2,400,000 =16800000*1/7
Friday (X) 2,400,000 =16800000*1/7
Total (7X) 16,800,000

Option I - If Transactions are done daily

Transaction cost per day 2,500
No of days in a week 5
(A) Transaction cost per week 12,500
(B) Opprtunity cost -
Total Cost per week 12,500

Option II - If Transactions are done only on Friday

No of Transactions in a week 1
(A) Transaction cost per week 2,500
(B) Opprtunity cost
Monday (48,00,000*4/360*15%) 8,000
Tuesday (48,00,000*3/360*15%) 6,000
Wednesday (24,00,000*2/360*15%) 2,000
Thursday (24,00,000*1/360*15%) 1,000
Opprtunity cost per week 17,000
Total Cost per week 19,500

Option III - If Transactions are done twice a week i.e. on Tue & Fri
No of Transactions in a week 2
(A) Transaction cost per week 5,000
(B) Opprtunity cost
Monday (48,00,000*1/360*15%) 2,000
Tuesday -
Wednesday (24,00,000*2/360*15%) 2,000
Thursday (24,00,000*1/360*15%) 1,000
Friday -
Opprtunity cost per week 5,000
Total Cost per week 10,000
er three days of the week
Cost Benefit analysis of Debtors Management
Benefit
1) Increase in Contribution / Profit XX
Costs
1 ) Increase in Bad Debts XX
2 ) Increase in financing cost XX
3) Increase in Administration cost xx
Net Benefit
 Statement showing evaluation of Credit policy
Present Policy Policy Option I
Collection period 1 month 2 months

1) Sales 5,000,000 6,000,000

2) P/V Ratio 40% 40%
3) Contribution 2,000,000 2,400,000
Less: Costs
4) Less: Fixed cost 1,000,000 1,000,000
5) Bad Debts (% of Credit Sales) 50,000 150,000
6) Finance cost @20% 83,333 200,000
Net Benefit 866,667 1,050,000

WN Debtors (selling price) 416,666.67 1,000,000

Alternative Solution - If Debtors are taken at cost

Statement showing evaluation of credit policy

Present Option I
Sales 5,000,000 6,000,000
Variable cost 3,000,000 3,600,000
Contribution 2,000,000 2,400,000
Less: Fixed cost 1,000,000 1,000,000
Less: Bad Debts 50,000 150,000
Less: Int on Investment in Drs 66,667 153,333
Estimated profits 883,333 1,096,667
WN
Cost of Sales (FC +VC) 4,000,000 4,600,000
Collection period 1 month 2 months
Investment in Drs 333,333 766,667
Int cost @20% 66,667 153,333
 Policy Option II
3 months

6,500,000
40%
2,600,000

1,000,000
325,000
325,000
950,000

1,625,000

cy
Option II
6,500,000
3,900,000
2,600,000
1,000,000
325,000
245,000
1,030,000

4,900,000
3 months
1,225,000 (cost of sales * collection period/12)
245,000
Statement showing evaluation of Credit policy
Present Policy Policy Option I Policy Option II
Collection period 1 month 2 months 3 months

Sales 3,000,000 3,240,000 3,900,000

P/V Ratio ( 4/12 *100) 33.33% 33.33% 33.33%
Contribution 1,000,000 1,080,000 1,300,000
Less:
1) Fixed Cost 250,000 250,000 300,000
2) Bad Debts 30,000 64,800 234,000
3) Int on investment in Drs 50,000 108,000 195,000
Net Benefit 670,000 657,200 571,000

WN: Debtors 250,000 540,000 975000

(Credit Sales * Debt Collection period /12)
WN 1 Total Sales 600000 Total cost pu 2.25
Selling price pu 3 Variable cost pu 2
No of units 200000 Fixed cost pu 0.25
* No of units 200000
Total FC 50000

Statement showing evaluation of Credit policy

Present A B C D
Collection period (Days) 30 40 50 60 75

Sales 600,000 630,000 648,000 675,000 690,000

Contribution (1/3) 200,000 210,000 216,000 225,000 230,000
Less:
1) Fixed Cost 50,000 50,000 50,000 50,000 50,000
2) Bad Debts 6,000 9,450 12,960 20,250 27,600
3) Int on invest in Drs 10,000 14,000 18,000 22,500 28,750
Net Benefit 134,000 136,550 135,040 132,250 123,650

WN: Debtors at SP 50,000 70,000 90,000 112,500 143,750

(Credit Sales * Debt Collection period /12)
 Credit terms are 2/10, net 30

Rate of Cash No of Days Maximum credit period

Discount for making payment
Collection period
(i) Customers taking discount = 65% 10 Days
Customers NOT taking discount = 35% 30 Days
Weighted average collection period = (65%*10 Days) + (35% * 30 Days)
17 Days

(ii) No of transactions per month 1300

No of transactions per year 15600
Value per transaction 1750
Sales pa 27,300,000
Average Collection period 17 Days
Average Debtors 1,289,167
 Existing Proposed

Total sales 8,000,000 Total sales 8,500,000

Cost of sales @95% 7,600,000 Cost of sales 8,025,000
Variable cost @85% 6,800,000 Variable cost @85% 7,225,000
Fixed Cost 800,000 Fixed Cost 800,000
Profit 400,000 Profit 475,000
Existing policy 1/10 Net 30 Existing policy 2/10 Net 30

Weight Credit Total Weight

period
Availing Discount 50% 10 5 Availing Discount 80%
Not availing discount 50% 30 15 Not availing discount 20%
Average credit period 20 Average credit period

Investment in Debtors (76,00,000*20/360) = 422,222 Investment in Debtors (80,25,000*14/360) =

(Cost of sales x Average credit period / no of days in year) (Cost of sales x Average credit period / no of days in
Interest on Investment in debtors @10% = 42,222 Interest on Investment in debtors @10% =

Existing Discount (80,00,000 *0.50*0.01) = 40,000 Proposed Discount (85,00,000 *0.80*0.02) =

roposed Cost benefit analysis
Benefits
Increase in Profit 75,000
Decrease in int 11,014
86,014
Costs
Increase in Discount 96,000
2/10 Net 30
Alternative working
Credit Total Variable cost rattio 85%
period PV ratio 15%
10 8 Increase in sales 500000
30 6 Increase in contribution
14 (5,00,000*0.15) = 75000

25,000*14/360) = 312,083
edit period / no of days in year)
ebtors @10% = 31,208

000 *0.80*0.02) = 136,000

 Benefits to Firm
a) Existing Credit sales 26,750,000
Existing Bad Debts 267,500
Reduction in Bad Debts 187,250
(2,67,500*0.70)
b) Reduction in Admin Costs 50,000
c) Reduction in Finance Costs
Existing Debtors 4,458,000
New Collection period (in Days) 35
New Debtors 2,600,694
(2,67,50,000*35/360)
Saving in Finance Cost 130,035
(26,00,694*0.05)
TOTAL BENEFITS 367,285

Costs to Firm
a) Factoring commission 200,625
(2,67,50,000*0.75%)
b) Increase in Interest 41,221
TOTAL COSTS 241,846

NET BENEFIT 125,439

Increase in Interest
Current cost of short term capital 0.05
Rate of interest charges by factor 0.07
Increase in rate of interest 0.02 (0.07-0.05)

New Debtors 2,600,694 C11

Less: Factoring Commission 19,505 (26,00,694*0.75/100)
Less: Reserves 520,139 (26,00,694*20/100)
Advance by Factor 2,061,050

Incremental interest p.a. 41,221 (20,61,050*2%)

(20,61,050 *0.02)