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

Rohit Engineering has the following days: inventory conversion period 70, receivables collection period 45, payables deferral period 55. Annual cash outflows on operations are Rs 9,00,00,000 (360-day year). If the firm manages to cut the receivables period by 10 days, by how much does the minimum cash requirement fall?

Rs 25,00,000. Daily cash outflow is Rs 9 crore divided by 360, or Rs 2,50,000. Shortening receivables by 10 days shortens the cash cycle from 60 to 50 days, so cash required falls by 10 days of outflow, which is Rs 25,00,000.

  1. ARs 25,00,000Correct
  2. BRs 20,00,000
  3. CRs 2,50,000
  4. DRs 10,00,000

Explanation

Daily cash outflow = 9,00,00,000/360 = Rs 2,50,000. A 10-day cut in the cash cycle reduces required cash by 10 x 2,50,000 = Rs 25,00,000. The original cycle is 70+45-55 = 60 days and the new one is 50 days, which confirms the reduction. Rs 2,50,000 is only one day's outflow.

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