Page 230 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 13: Integration of Working Capital and Capital Investment Process

10.5 per cent on deposits but has a ` 200 fee for withdrawal of any size, AMC Services has Notes
annual cash disbursements of `4 crore. Mahajan is considering establishing an account
with GGF, transferring funds to FGF only occasionally, and using the FGF account to
handle daily transaction.
(a) Using a 360-day year, find the daily disbursement of funds.

(b) When Mahajan makes a transfer, what the size of transfer be?
(c) How often should Mahajan make transfers?
(d) If Mahajan does not change to the GGF, what will be his average balance in the FGF
(assuming the ` 4 crore for disbursements is available at the beginning of the year)?
What annual interest will this account earn.
(e) If Mahajan establishes the GGF account, what will be his average balance and annual
interest from FGF?
(f) What will be the average balance and the annual interest from GGF?
(g) What is the marginal value of establishing the GGF account?

5. What might be the benefit of tracking selected financial ratios in order to monitor the
financial growth of a firm over time?
6. What corrective actions would you suggest to a firm which may not be operating under
full capacity of the investment made?
7. What trend would be shown by the inventories of final products of a firm which is
experiencing a negative shock to demand and why?
8. What would a firm do in order to make sure that it can carry out an investment plan that
takes years without interruption due to lack of cash?

9. Suggest how a standard approach to investment planning may help in managing the cash
flow crisis of a firm.
10. Do you agree/disagree with the statement that lengthening of payments on receivables
that was not forecast can result in a cumulative shortfall in the actual cost inflows from an
investment. Why/why not?

Answers: Self Assessment

1. Capital 2. capital

3. no 4. IRR
5. lower 6. cash flows
7. negative 8. greater

9. optimal 10. uncertain, dynamic
11. reduction 12. Decision Tree
13. period 14. highly
15. valuation

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