CASH CONVERSION CYCLE Parramore Corp has $19 million of sales, $3 million of inv
ID: 2789428 • Letter: C
Question
CASH CONVERSION CYCLE
Parramore Corp has $19 million of sales, $3 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 9% 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 9% each and increase its payables by 9%, 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 9% each and increase its payables by 9%, 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 9% each and increase its payables by 9%, 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. .................... $
Explanation / Answer
1. Days inventory outstanding(DIO)= 365*(Average Inventory)/Sales = 365*3/19 = 57.63 days
Days sales oustanding(DSO)= 365*(Average receivables)/Sales= 365*4/19= 76.84 days
Days payables oustanding(DPO)= 365*(Average payables)/COGS= 365*1/(0.7*19) = 27.44 days
Cash conversion cycle= DIO+ DSO-DPO= 107.03 days
2. It is given that Parramore would lower its inventories and receivables by 9% each and increase its payables by 9%.
New inventory= 0.91*3 = $2.73 million
New receivables= 0.91*4= $3.64 million
New payables= 1.09*1 = $1.09 million
So, new cash conversion cycle= 365*2.73/19 + 365*3.64/19 - 365*1.09/(0.7*19)= 52.44 + 69.93 - 29.91= 91.86 days
3. Previous working capital= Current assets- Current liabilities= $(3+4)-1= $ 6 million
New working capital= $(3+4)*0.91- 1*1.09= $6.37-1.09 million= $ 5.28 million
Cost of working capital= 6%
So, savings in terms of cost of working capital= 0.06*(6-5.28)= $0.0432 million or $43200 cash will be freed up.
4. As $43200 cash is saved in cost of working capital, so the pretax profit would also increase by the same amount.
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