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Sir, Can you explain me how question 3 (a) finance cost saving is calculated? I did not understand the way examiner calculated?
The current overdraft is 1,326,600, which is given in the question, and so at the moment they are paying interest on this at 5% (the short term borrowing rate).
From part a ii, we are able to calculate what the new overdraft will be – 646,049 (ask again if you are not clear about the working for this) – and so the interest in future will only be 5% of this amount.
Therefore the interest saved will be 5% of the difference. 5% x (1326600 – 646049) = $34,028
First you need to calculate the new receivables and inventories. You can do this because you know the sales and cost of sales, you know the inventory days and receivables days, so you can use the standard formulae.
So then you have the total current assets.Since you know that the net working capital will stay at 300.8, you can then calculate the total current liabilities.
You can then calculate the new payables – you know the cost of sales and the payables days, so again it is the standard formula.
The overdraft is then the missing figure.
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