Working Capital Management 1. Adams Stores, Inc. is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Adams sales last year (all on credit) were $150,000, and it earned a net profit of 6%. It turned over inventory 7.5 times, during the year and its DSO was 36.5 days. Its annual cost of goods sold was $121,667. The company had fixed assets totally $35,000. Adams payable deferral period is 40 days.

Assume the company work for reported sales of $10 million and an inventory turnover of 2. The company is now adopting a new inventory system as part of its working capital management. If the new system is able to reduce the companys inventory level and increase inventory turnover ratio to 5 while maintaining the same level sales, how much cash will be freed up as a result of the new inventory system.