Cash conversion cycle Primrose Corp has $16 million of sales, $1 million of inve

Question

Cash conversion cycle Primrose Corp has $16 million of sales, $1 million of inventories, $4 million of receivables, and $3 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.

If Primrose could lower its inventories and receivables by 7% each and increase its payables by 7%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places. _____days

How much cash would be freed-up? Round your answer to the nearest cent. $ ___

By how much would pre-tax profits change? Round your answer to the nearest cent. $ ____

Explanation / Answer

CCC = inventory conversion period + average collection period - payable deferral period Average collection period= Avge AR/Sales =4/(16/365) = 91.25 days inventory conversion period = AVg Inv/COGS perday = 1/(75%*16/365) = 30.42 days Payables Deferral Period = Payables/(COGS/365) = 3/(75%*16/365) = 91.25 days So CCC = 91.25+30.42-91.25 = 30.42 days .............(a) Post changes :Reduce inventories and receivables by 7% each and increase its payables by 7% So New Inventory = 1*(1-7%) = 0.93M New Rxable = 4*(1-7%) = 3.72M New Payable = 3*(1+7%) = 3.21M So Average collection period= Avge AR/Sales =3.72/(16/365) = 84.86 days Inv conversion period = AVg Inv/COGS perday = 0.93/(75%*16/365) = 28.29 days Payables Deferral Period = Payables/(COGS/365) = 3.21/(75%*16/365) = 97.64 days So CCC = 84.86 +28.29-97.64 = 15.51days .........(b) How much cash would be freed-up? Cash freed up: ? Inventory = (30.42 – 28.29) * (75%*16/365) = $0.07 ? Receivables = (91.25 -84.86)*(16/365) = $0.28 ? Payables = (91.25 – 97.64)*(75%*16/365) = $(0.21) Cash freed up = 0.07+0.28-(0.21) = $0.56 M By how much would pre-tax profits change? Pre Tax profit will Increase by 8%*0.56M = $0.04 M or $44,800.00

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