Question

CASH CONVERSION CYCLE Parramore Corp has $14 million of sales, $3 million of inventories, $2 million of receivables, and $3 million of payables. Its cost of goods sold is 70% 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. 1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. days 2. If Parramore 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? Do not round intermediate calculations. Round your answer to two decimal places. days 3. How much cash would be freed up, if Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13, 200,000. $ 4. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13, 200,000. $

Answer 1

1)

cash conversion cycle = inventory conversion period + average collection period - Payables deferral period

first lets find out per day cost of goods sold

total sales = $14,000,000

cost of goods sold = 14,000,000 x 0.7 = 9,800,000

cost of goods sold per day = 9800000 / 365 = 26,849.315

inventory conversion period = inventory / cost of goods sold per day

= 3,000,000 / 26,849.315

= 111.73469 days

average collection period = receivables /  (sales / 365)

= 2000000 / 38356.16

= 52.14285 days

Payables deferral period = payables / cost of goods sold per day

= 3,000,000 / 26,849.315

= 111.73469 days

cash conversion cycle = 111.73469 + 52.14285 - 111.73469

= 52.14 days(rounded to two decimals

2)

new inventory = 3000000(1 - 0.12) = 2,640,000

new receivables = 2,000,000(1 - 0.12) = 1,760,000

new payables = 3000000(1+0.12) = 3,360,000

inventory conversion period = inventory / cost of goods sold per day

= 2640000 / 26,849.315

= 98.32653 days

average collection period = receivables /  (sales / 365)

= 1,760,000 / 38356.16

= 45.88572 days

Payables deferral period = payables / cost of goods sold per day

= 3,360,000 / 26,849.315

= 125.14286 days

cash conversion cycle = 98.32653+45.88572 - 125.14286

= 98.32653+45.88572-125.14286

= 19.07 days(rounded to two decimals)

3)

cash freed up:

inventory = (111.73469 - 98.32653) * 26,849.315 = 360,000

receivables = (52.14285 - 45.88572) * 38356.16 = 240,000

payables = (125.14286 - 111.73469) * 26,849.315 = 360,000

cash freed up = 360,000+240,000 - 360,000 = 240,000

4)

savings of finance costs = 8% of cash freed up

increase in pretax profits = 240,000 x 8% = $19,200