Wilson Electric Company, a manufacturer of various types of electrical equipment, is examining its working capital investment policy for next year. Projected fixed assets and current liabilities are $20 million and $18 million, respectively. Sales and EBIT are partially a function of the company's investment in working capital-particularly its investment in inventories and receivables. Wilson is considering the following three different working capital investment policies:
a. Determine the following for each of the working capital investment policies:
i. Rate of return on total assets (that is, EBIT/total assets)
ii. Net working capital position
iii. Current ratio
b. Describe the profitability versus risk trade-offs of these threepolicies.