Question
Wright Industries Limited traditionally follows a highly aggressive working capital policy with no long-term borrowings. Below are key details recently compiled: Items $ (million) Sales
Wright Industries Limited traditionally follows a highly aggressive working capital policy with no long-term borrowings. Below are key details recently compiled: Items $ (million) Sales (all on credit) 24 Purchases (all on credit) 8 Gross profit 6 Average receivables 3 Average inventory 2 Average accounts payables 2 The firm is also proposing to offer a 4/10, net /30 discount policy to reduce accounts receivables. Wrights anticipates 30% of its customers will take advantage of the discount. As a result of this discount policy, the collection period will be reduced to 1 months. The company also provides the following data: Current annual credit sales 24 000 000 Collection period 2 months Terms net /30 Required rate of return 12% Determine: i. the firms working capital cycle, that is, cash conversion cycle. (4 marks) ii. whether the firm should offer the new discount policy to customers. (6 m
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