Fundamentals of Financial Manageme...
Fundamentals of Financial Manageme...
CASH CONVERSION CYCLE Primrose Corp has $15million of sales, $2million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80% of sales, and it finances working capital with bank loans at an 8% rate. What is Primrose’s cash conversion cycle (CCC)? If Primrose could lower its inventories and receivables by 10% each and increase its payables by 10%, all without affecting sales or cost of goods sold, what would be the new CCC, how much cash would be freed up, and how would that affect pretax profits?
To determine: The cash conversion cycle of P Company, the new cash conversion cycle when inventories are lowered and receivables by 10%, the amount of cash that would be free up, and its effect on pretax profits.
Cash conversion cycle:
The cash conversion cycle refers to a tool used to measure the effectiveness of the management of a company and the overall health of that company.
Calculate the cash conversion cycle of P Company by following the steps given below:
Step 1: Calculate the inventory conversion period.
Therefore, the inventory conversion period of P Company is 60.83 days.
Step 2: Calculate the average collection period.
Therefore, the average collection period is 73 days.
Step 3: Calculate the payables deferral period.
Therefore, the payables deferral period is 30.42 days.
Step 4: Calculate the cash conversion cycle.
Therefore, the cash conversion cycle is 103.41 days.
Calculate the new cash conversion cycle by following the steps given below.
Step 1: Calculate the inventory conversion period.
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