Primrose Corp has $12 million of sales, $3 million of inventories, $4 million of

Question

Primrose Corp has $12 million of sales, $3 million of inventories, $4 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 8% rate. Assume 365 days are in year for your calculations. (Do not round intermediate steps. )

1. What is Primrose's cash conversion cycle (CCC)? Round your answer to two decimal places. ________ days

2. If Primrose could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places. _______ days

3. 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

1) inventory conversion day =$3,000,000/((0.85*$12,000,000)/365)=107.35 days Average collection period = $4,000,000/($12,000,000/365)=121.66 days Payable deferred period = $1,000,000/((0.85*$12,000,000)/365)=35.78 days CCC = 107.35 + 121.66 - 35.78 = 193.23days 2) inventory = $3,000,000 × 0.91 = $2730000 A/R = $4,000,000 × 0.91 = $3640000 A/P = $1,000,000 × 1.09 = $1090000 Inventory conversion period = $2,730,000/((0.85*$12,000,000)/365)=97.69days Average collection period = $3,640,000/($12,000,000/365)=110.72 days Payables deferred period = $1,090,000/((0.85*$12,000,000)/365)=39 days New CCC = 97.69+110.72-39= 169.41 days 3) Cash freed up: Inventory = (107.35 – 97.69)((0.85*$12,000,000)/365)=$269950.68 Receivables = (121.66– 110.72)*($12,000,000/365) = $359671.23 Payables = (39-35.78)*((0.85*$12,000,000)/365) = $89,983.56 cash freed=$269950.68+$359671.23-$89,983.56=$539638.35

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