Aqua Corp. is considering a change in marketing strategy which would cost $100,000 per year (pre-tax) and increase the company’s overall inventory by 4%. Sales (as well as payables and receivables) would immediately increase by 3% on a permanent basis but would require no additional fixed assets. Currently, the company has annual sales of $33.7 million (20% of which are made on net 30 credit terms) but no growth and maintains 44 days of sales in inventory. Accounts payable averaged $4.2 million over the past 12 months. a) How long is the company’s cash conversion cycle?
Aqua Corp. is considering a change in marketing strategy which would cost $100,000 per year (pre-tax) and increase the company’s overall inventory by 4%. Sales (as well as payables and receivables) would immediately increase by 3% on a permanent basis but would require no additional fixed assets. Currently, the company has annual sales of $33.7 million (20% of which are made on net 30 credit terms) but no growth and maintains 44 days of sales in inventory. Accounts payable averaged $4.2 million over the past 12 months.
a) How long is the company’s cash conversion cycle?
b) If the gross margin is 20%, the cost of capital 13%, and the tax rate 25%, does the proposed marketing strategy create value for the firm?
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