CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management
Mehta Plastics estimates its annual cash cost of operations at Rs 48,00,000. Its operating cycle is 90 days and a year is taken as 360 days. Ignoring any safety margin, what is the estimated working capital requirement using the operating cycle approach?
The working capital requirement is Rs 12,00,000. With a 90-day operating cycle in a 360-day year the firm completes four cycles annually, so annual cash operating cost of Rs 48,00,000 divided by four gives the funds required to sustain one cycle.
- ARs 12,00,000Correct
- BRs 16,00,000
- CRs 9,60,000
- DRs 24,00,000
Explanation
Cycles per year = 360/90 = 4. Working capital = 48,00,000 / 4 = Rs 12,00,000. Rs 24,00,000 wrongly assumes 2 cycles, and Rs 16,00,000 uses 3 cycles.
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