Cash conversion cycle Primrose Corp has $14 million of sales, $1 million of inve
ID: 2711449 • Letter: C
Question
Cash conversion cycle
Primrose Corp has $14 million of sales, $1 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 85% of sales, and it finances working capital with bank loans at an 6% rate. Assume 365 days in year for your calculations. Round intermediate steps to 2 decimal places.
What is Primrose's cash conversion cycle (CCC)? Round your answer to two decimal places.
days
If Primrose could lower its inventories and receivables by 12% each and increase its payables by 12%, 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
Inventory conversion period = $1,000,000/((0.85*$14,000,000)/365)=30.67 days
Average collection period = $3,000,000/($14,000,000/365)=78.21 days
Payables deferred period = $1,000,000/((0.85*$14,000,000)/365)=30.67 days
CCC = 61.34 + 78.21 - 30.67 = 78.21 days
inventory = $1,000,000 × 0.88 = $880,000
A/R = $3,000,000 × 0.88 = $2,640,000
A/P = $1,000,000 × 1.12 = $1,200,000
Inventory conversion period = $880,000/((0.85*$14,000,000)/365)=26.99days
Average collection period = $2,640,000/($14,000,000/365)=68.82 days
Payables deferred period = $1,100,000/((0.85*$14,000,000)/365)=33.84 days
New CCC = 26.99 + 68.82 - 33.84 = 61.97 days
Cash freed up:
Inventory = (30.67 - 26.99)*((0.85*$14,000,000)/365) = $119978.08
Receivables = (78.21 – 68.82)*($14,000,000/365) = $360164.38
Payables = (33.84 – 30.67)*((0.85*$14,000,000)/365) = $103350.68
Cash freed up = $119978.08 + $360164.38 + $103350.68 = $583493.15
$583493.15 × 0.06 = $35009.59 increase in pre-tax profit.
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