The CEO of a medium-sized mechanical workshop, whose main business is focused on being a subcontractor to major Swedish companies in various industries and a supplier of various steel structures, has drawn attention to inefficiencies regarding the management of working capital. The large customers make great demands in terms of customer credit time and inventory, at the same time the company itself must pay its suppliers within 25 days. The company also has a high cost of capital and difficulties with liquidity. The CEO has now decided to make an analysis of the situation and how much capital can possibly be released and how the capital costs would be affected.

Below is a description of the prevailing conditions:

Turnover: SEK 50,000,000 / year

Average customer credit period: 58 days

Average stock: SEK 7,500,000

Liquidity needs: 12% of sales

Average supplier credit period: 23 days

Purchase price of goods from subcontractors: SEK 10,000,000 per year

Capital cost: 8%

The CEO has set new goals regarding capital tied up as follows:

Turnover: SEK 50,000,000 / year

Average customer credit period: 33 days

Average stock: SEK 5,500,000

Liquidity needs: 8% of sales

Average supplier credit period: 30 days

Purchase price of goods from subcontractors: SEK 10,000,000 / year

Capital cost: 5%

a) How will the need for working capital be affected if the above objectives are met. For points, it is required that all calculations are reported in a clear manner.

b) How is the result affected? Motivate your answer.