Cash conversion cycle Primrose Corp has $18 million of sales, $3 million of inve
ID: 2713664 • Letter: C
Question
Cash conversion cycle
Primrose Corp has $18 million of sales, $3 million of inventories, $4 million of receivables, and $2 million of payables. Its cost of goods sold is 85% of sales, and it finances working capital with bank loans at an 7% 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 11% each and increase its payables by 11%, 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 = $3,000,000/((0.85*$18,000,000)/365)= 71.57 days
Average collection period = $4,000,000/($18,000,000/365)=81.11 days
Payables deferred period = $2,000,000/((0.85*$18,000,000)/365)=50.69 days
CCC = 71.57 + 81.11 - 50.69 = 101.99 days
inventory = $3,000,000 × 0.89 = $2,670,000
A/R = $4,000,000 × 0.89 = $3,560,000
A/P = $2,000,000 × 1.11 = $2,200,000
Inventory conversion period = $2,670,000/((0.85*$18,000,000)/365)=63.70days
Average collection period = $2,640,000/($14,000,000/365)=72.19 days
Payables deferred period = $1,100,000/((0.85*$14,000,000)/365)=56.27 days
New CCC = 63.7 + 72.19 - 56.27 = 79.62 days
Cash freed up:
Inventory = (71.57 - 63.70)*((0.85*$18,000,000)/365) = $329893.15
Receivables = (81.11 – 72.19)*($18,000,000/365) = $439890.41
Payables = (56.27 – 50.69)*((0.85*$18,000,000)/365) = $233901.37
Cash freed up
= 329893.15 + 439890.41 + 233901.37 = 1003684.93
Change in pretax profit will be 0 as there is no change in sales and COGS
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