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Greetings, so I saw the answer to this question. But I used other methods and calculations and I got my answer wrong. I will show you my methods so you can explain to me nicely and elaborately where I went wrong, so I avoid such fallacies again God willing.
Finance cost saving:
First method:
5m x 30/365 x 0.1 = $41,095.89
= $41,096Second method:
25m x 30/365 x 0.1 = $20,548Neither of your workings make any sense.
You know that the current receivables are $5M.
You can calculate the new receivables using the way I explain in my lectures (and I have no idea where you are getting ’30’ from).
The finance saving is the difference between the two multiplied by the interest rate.
The only sensible way of arriving at the answer is the way the BPP answer shows.
Second method:
So ’30’ is basically the months of receivables saved (90 days reduced to 60 days, 90-60=30) So I used that saved receivable days directly to multiply with the 25m sales x 0.1 : and find out the savings in terms of amount, instead of the longer procedure- first find amount for 60 days, then minus from 90days amount.
90 days is of no relevance. The question tells you the current level of receivables.
Good day sir.
If you were more elaborate why 90 days was of no relevance, it would help us understand better.
I just realized my error. The 90days are for payables. Whereas these are talking about receivables. Otherwise Q.76-80 are relevant to the scenario elaborated at the beginning.Thankyou sir.
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