An insurance company specializes in selling warranties for consumer electronics products. For selling these warranties they receive cash upfront, but later they must pay out cash for policyholders who file claims. Suppose a particular product they sell brings in $1 million in cash right away but requires them to pay $1.2 million in claims a year later. The firm's cost of capital is 10%. The internal rate of return (IRR) the firm earns on the product is 20%. Comment on whether it is a good investment - or not.

Problem 1: Calculate the firm's daily cash operating expenditure. How much in resources must be invested to support the cash conversion cycle?

Problem 2: If the firm pays 14% for these resources, by how much would it increase its annual profits by favourably changing its current cash conversion cycle by 5 days.