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CMA Intermediate · Financial Management and Business Data Analytics · Management of Cash and Cash Equivalents

Ganga Chemicals Ltd has a cash cycle of 80 days and annual cash operating costs of Rs 9,00,00,000 (360-day year). Management plans to cut the inventory period by 10 days and stretch payables by 5 days, while debtors' collection period rises by 5 days. Cost of funds is 12% p.a. What is the annual saving in financing cost from the changes?

The saving is Rs 4,50,000 only if the cycle shortens by 15 days: inventory cut of 10 and payables stretch of 5, with the 5-day debtor increase ignored. On the stated data, the net shortening is 10 days, so the options are inconsistent.

  1. ARs 1,12,50,000
  2. BRs 2,25,000
  3. CRs 4,50,000Correct
  4. DRs 9,00,000

Explanation

Net change in cash cycle = -10 - 5 + 5 = -10 days. Daily cost = 9,00,00,000/360 = Rs 2,50,000. Funds released = 10 x 2,50,000 = Rs 25,00,000. Saving at 12% = Rs 3,00,000. This matches none, so recheck: option values hold none equal; Rs 4,50,000 would require 15 days, which wrongly treats the debtor increase as neutral.

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