Question

B manufactures and sells equipment for amateur and professional competitors in equestrian sports (such as horse racing, steeplechase, show jumping, and harness racing). The company's annual sales are $5.2 million, its gross profit is $1.4 million, and its purchases are $0.8 million. The company's credit sales are 83% of its total sales, where all customers pay within 30 days, and the remainder of the sales are paid for in cash. Payments to suppliers average 25 days, and the company's inventory is turned over every 3 months. Assume a 365-day year with 30 days per month.

If the cost of capital for the business is 10%, calculate the cost of financing the investment in the company's operational resources.  Give your answer in dollars, rounded to the nearest whole number. Do not round intermediate calculations. (Hint: Solving this problem in Excel is likely to be the best approach.)

Please give a step-by-step answer and clearly explain the problem solving process.

Answer 1

1]	Cost of goods sold % = (5.2-1.4)/5.2 =	73.08%
2]	Investment in receivables = 5200000*73.08%*83%*30/365 =	$          259,244
	Investment in inventory = 5200000*73.08%/3 =	$       1,266,720
	Payables outstanding =-800000*25/365 =	$          (54,795)
	Investment in net working capital	$       1,471,169
3]	Cost of financing the investment = 1471169*10% =	$          147,117