Question

Suppose that the average daily float of a company is Rs. 3 million with a weighted...

Suppose that the average daily float of a company is Rs. 3 million with a weighted average delay of 5 days. What is the total amount unavailable to earn interest? What is the NPV of a project that could reduce the above delay by 3 days if the cost is Rs. 8 million?

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Answer #1

Given,

Average daily float = Rs. 3 million

Weighted average delay = 5 days

Reduction in delay = 3 days

Cost = Rs. 8 million

Solution :-

Total amount unavailable to earn interest = Average daily float x Weighted average delay

= Rs. 3 million x 5 days = Rs. 15 million

Immediate cash inflow = Average daily float x reduction in delay

= Rs. 3 million x 3 days = Rs. 9 million

NPV of the project = Immediate cash inflow - cost

= Rs. 9 million - Rs. 8 million = Rs. 1 million

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