Part 1:
Information Provided in the question -
[All figures subsequently shown in calculation are in $ millions]
Cash Conversion Cycle(CCC) = Days of Inventory outstanding(DIO) + Days of Sales outstanding(DSO) - Days of Payables Outstanding(DPO)
DIO = (Avg Inventory/COGS)*365
COGS = Sales * COGS as % of sales = 19*65% = 12.35
DIO = (3/12.35)*365 = 88.66
DSO = (Avg Accounts Receivable/Sales)*365
= 57.63
DPO = (Avg accounts Payable/COGS)*365
= 29.55
CCC = DIO + DSO - DPO
= 88.66+57.63-29.55
= 116.74 days
Also, check the attached calculation in excel -
Part 2:
Decrease Inventory by 11%
New Inventory = 3*(1-11%) = 2.67
Decrease Receivables by 11%
New Receivables = 3*(1-11%) = 2.67
Increase Payables by 11%
New Payables = 1*(1+11%) = 1.11
Repeating calculations as in part A -
New CCC = 97.40 days
Part 3:
Cash freed up = Decrease in Inventory + Decrease in Receivables
+ Increase in Payables
= (3 - 2.67) + (3 - 2.67) + (1.11 - 1)
= 0.33 + 0.33 + 0.11
= $ 0.77 million
cash freed up = $770,000
Part 4:
Company will save money by lowering interest paid on its working capital requirements.
Reduction in working capital = 770,000
Interest Saved = Reduction in working Capital * Interest on working
capital
= 770,000*8%
= $61,600
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