Working Capital Management, EOQ, and External Funds

Part  One: Working Capital Analysis

Capers, Inc. has just promoted you to Chief  financial officer. Since this is a new  office in the company, you are understaffed and many of the responsibilities  have been assigned to you.

The first task you have been assigned concerns  the cash conversion cycle. Your boss has  asked that you examine the following data:

  1. Inventory conversion period is 60 Days
  2. Payables deferral period is 30 days
  3. Receivables collection period of 40 days

The second task concerns the cost of bank loans  under differing conditions. Specifically:

  1. The company needs $1,500,000  for a new project.
  2. The loan will cost 10% simple interest, for 4 months, with a 20%  compensating balance.


  1. What is the firm’s cash conversion cycle?
  2. How many times per year is the firm’s inventory turnover, if sales are  $4,000,000 per year?             
  3. If sales are all credit sales and amount to $4,000,000 per year, what  is the firm’s average investment in receivables?
  4. What is the nominal interest rate on the loan?

Part  Two:  Cash Budget

Capers, Inc. is developing its cash budget for the next year. Of  Capers’ sales, 20% is for cash, another 60% is collected in the month following  sale, and 20% is collected in the second month following sale. November and  December sales for 2010 were $229000 and $250,000, respectively.

Capers’ purchases its raw materials two months in advance of its  sales equal to 70% of its final sales price. The supplier is paid one  month after it makes delivery. For example, purchases for April sales are  made in February, and payment is made in March.

In addition, Capers pays $10,000 per month for rent and $20,000  each month for other expenditures. Tax prepayments for $32,000 are made each quarter beginning in March.

The company’s cash balance at December 31, 2010, was $26,000 and  minimum balance of $25,000 must be maintained at all  times.  Assume that any short-term financing needed to maintain cash  balance would be paid off in the month following the month of financing if  sufficient funds are available. 

Interest on short-term loans (12%) is paid monthly.   Borrowing to meet estimated monthly cash needs takes place at the beginning of  the month.  For example, if in the month of April the firm expects to have  a need for an additional $60,500, these funds would be borrowed at the beginning  of April with interest of $605 (.12 x 1/12 x $60,500) owed for April and paid  at the beginning of May.

Sales  for Capers Inc.: 

January $229,000
February $250,000
March $270,000
April $275,000
May $280,000
June $290,000
July $280,000
August $260,000


  • Prepare a monthly cash budget for Capers Inc. covering the  first 7 months of 2010.

Part  Three:  EOQ

Capers Inc. is also initiating an inventory management program  using EOQ. Capers needs fastener supplies to manufacture its products. The CFO estimates that the company will need about 250,000 cases next year. The  cost of storing cases is about $1.10 each. The ordering cost is $400 for a  shipment.


  1. What is the EOQ?
  2. How many times will you order?
  3. What are the shortcomings of the EOQ? What is your  rationale?

Complete the requirements for Parts One, Two, and Three  above in a Microsoft Excel document showing all calculations, and in  good form.


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