Question

1. The RRR Company has a target current ratio of 2.3. Presently, the current ratio is 3 based on current assets of $8,010,000. If RRR expands its fixed assets using short-term liabilities (maturities less than one year), how much additional funding can it obtain before its target current ratio is reached? (Round your answer to the nearest dollar.)

(18) 2. You plan to accumulate $485,000 over a period of 8 years by making equal annual deposits in an account that pays an annual interest rate of 14% (assume all payments will occur at the beginning of each year). What amount must you deposit each year to reach your goal?

Answer 1

Solution:

1) Present current ratio = 3 & Current asset = $ 80,10,000

Therefore, Current liabilities = 26,70,000

Company is planning to raise short term funds for fixed asset financing which will not affect current assets.

Therefore with a target current ratio of 2.3

Current liabilities = 80,10,000 / 2.3

= $ 34,82,609

So, Additional funding before the target current ratio is reached = $ 3482,609 - $ 2670,000

= $ 812,609

2) Equal amount of annuities to accumulate $ 485,000 over a period of 8 years can be calculated by using

Future value of annuity due formula

Let annual deposit amount be x

FV = A[(1+i)n -1 / i] * (1+i)

485000 = x [(1.14)8-1 / 0.14] * 1.14

485000 = x[(1.8525 / 0.14) * 1.14)

485000 = x (13.2321 * 1.14)

485000 = x * 15.0845

x = $ 32,152.21 or say 32,152

Therefore, the amount to be deposited each year is $ 32,152