Parramore Corp has $14 million of sales, $1 million of inventories, $4 million of receivables, and $1 million of payables. Its cost of goods sold is 70% of sales, and it finances working capital with bank loans at an 6% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.
Part a
days outstanding sale = 4*365 / 14 = 104.2857
days inventory outstanding = 1*365/ 9.8 = 37.24
days payable outstanding = 1*365/ 9.8 = 37.24
CASH Conversion cycle = 104.2857 + 37.24 -37.24 = 104.2857 or 104.29
Part b
days outstanding sale = 3.6*365 / 14 = 93.86
days inventory outstanding = 0.9*365/ 9.8 = 33.52
days payable outstanding = 1.1*365/ 9.8 = 40.97
CASH Conversion cycle = 93.86 + 33.52 -40.97= 86.41
Part c
Cash freed up = [4-3.6] + [1-0.9] + [1.1-1] = 0.6 = 600,000
Part d
Increase in pretax profit = 600,000 * 0.06 = 36,000
Parramore Corp has $14 million of sales, $1 million of inventories, $4 million of receivables, and...
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