Impact on Liquidity Optimal Amount(Level)of Current Assets Liquidity Analysis Policy Liquidity/2 Policy A Policy B ABc High Average Policy C LoW Current Assets Greater current asset levels generate more liquidity all other factors held constant 25,000 50,000 OUTPUT(units) 8-6
8-6 Impact on Liquidity Liquidity Analysis Policy Liquidity A High B Average C Low Greater current asset levels generate more liquidity all other factors held constant. Optimal Amount (Level) of Current Assets 0 25,000 50,000 OUTPUT (units) ASSET LEVEL ($) Current Assets Policy C Policy A Policy B
Impact on Expected Optimal Amount Level)of Current Assets Return on Investment s Net Profit Policy A Total Assets Policy B Let Current Assets s Policy C (Cash Rec +Inv) Return on Investment s Current Assets Net Profit Current Fixed Assets 25,000 50,000 OUTPUT(units) 8-7
8-7 Impact on Expected Profitability Return on Investment = Net Profit Total Assets Let Current Assets = (Cash + Rec. + Inv.) Return on Investment = Net Profit Current + Fixed Assets Optimal Amount (Level) of Current Assets 0 25,000 50,000 OUTPUT (units) ASSET LEVEL ($) Current Assets Policy C Policy A Policy B
Impact on Expected Optimal Amount Level)of Current Assets Profitability Analysis Policy Profitability Policy A u Policy B ABc LoW Average High --00 Policy C As current asset levels Current Assets decline, total assets willl decline and the roi will rIse 25,000 50,000 OUTPUT(units) 8-8
8-8 Impact on Expected Profitability Profitability Analysis Policy Profitability A Low B Average C High As current asset levels decline, total assets will decline and the ROI will rise. Optimal Amount (Level) of Current Assets 0 25,000 50,000 OUTPUT (units) ASSET LEVEL ($) Current Assets Policy C Policy A Policy B
Impact on Risk Optimal Amount(Level)of Current Assets Decreasing cash reduces the firm's ability 山品 Policy A to meet its financial obligations. More risk Policy B Stricter credit policies Policy C reduce receivables and possibly lose sales and customers. More risk! Current Assets Lower inventory levels increase stockouts and lost sales, More risk! 25,000 50,000 OUTPUT(units) 8-9
8-9 Impact on Risk Decreasing cash reduces the firm’s ability to meet its financial obligations. More risk! Stricter credit policies reduce receivables and possibly lose sales and customers. More risk! Lower inventory levels increase stockouts and lost sales. More risk! Optimal Amount (Level) of Current Assets 0 25,000 50,000 OUTPUT (units) ASSET LEVEL ($) Current Assets Policy C Policy A Policy B