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