Question

A firm has a Days Receivables Outstanding (DRO) of 34 days. Its annual sales outstanding are $2.7 billion. If it could reduce its DRO to 30 days, how much cash could it free up for other investments? Assume a 360-day year.

A | $30,000,000 |

B | $21,250,000 |

C | $18,750,000 |

D | $20,000,000 |

Answer #1

HI

Days receivable outstanding tells us about number of days it takes to generate cash from Sales

Days receivable outstanding = Account Receivable*360/Sales

34 = Account rec.*360/2.7

Account receivable = 34*2.7/360 = 0.255 billion

now if DRO changes to 30 days then

new account receivable =30*2.7/360 = 0.225 billion

**So freed up cash = old account receivable -new account
receivable = 0.255-0.225 = $30,000,000**

**Hence option A is correct here.**

**Thanks**

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