Accompanying a new system might provide a company to gain a significant in its working capital cash flow so that profit margin can be improved (Augusto Felício, Couto & Caiado, 2014).
The new system of collection will reduce the collection period by 2.5days while the disbursement period can be increased by .5 days that will enable the company to hold the free cash of $2 million for each three days more in hand. Therefore, the total amount of free cash will be $2 mn x 3 days = $6 million for every three days.
The annual freed up fund is $6 mn x (360/3) [considering number of days 360 in a year]
= $720 million
Therefore earning of the company in a year is @8% of annual earning which is equal to $720 mn x 0.08 = $57.6 million. The income of the company will be $57.6 million as freed up cash flow has risen to $720 million in the year.
The cost of the new system will make the company to incur more $800000 while the cash inflow from the new system is $57.6 million.
Therefore, the difference between 57600000 – 800000 = $5.68 million.
Therefore, a positive return from the new return justifies the installation of the new system in the company (Buchmann, 2009).
Augusto Felício, J., Couto, E., & Caiado, J. (2014). Human capital, social capital and organizational performance. Management Decision, 52(2), 350-364. doi:10.1108/md-04-2013-0260
Buchmann, P. (2009). Return of the King: Working Capital Management zur Vermeidung von Liquiditätsengpässen in der Krise. Controlling & Management, 53(6), 350-355. doi:10.1007/s12176-009-0113-0
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