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CMA Intermediate · Financial Management and Business Data Analytics · Financing Working Capital

Kaveri Ltd needs ₹50 lakh of permanent working capital and a seasonal need that averages ₹20 lakh. Long-term funds cost 12% p.a. and short-term funds cost 9% p.a. Under a conservative policy, long-term funds finance the permanent need plus the entire seasonal need. Under a matching policy, short-term funds finance the seasonal need. What is the annual interest saving of the matching policy over the conservative policy (taking average amounts)?

The saving is ₹0.60 lakh a year. The seasonal ₹20 lakh costs 12% under long-term funding, which is ₹2.40 lakh, but only 9% under short-term funding, which is ₹1.80 lakh. The 3% rate difference on ₹20 lakh gives ₹0.60 lakh.

  1. A₹0.60 lakhCorrect
  2. B₹1.50 lakh
  3. C₹0.90 lakh
  4. D₹2.10 lakh

Explanation

Conservative cost on seasonal part = 20 lakh x 12% = 2.40 lakh. Matching cost on seasonal part = 20 lakh x 9% = 1.80 lakh. Saving = 0.60 lakh. The option ₹2.10 lakh wrongly adds the rates (21% x 10 lakh), and ₹1.80 lakh-type errors ignore the rate difference.

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