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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

WORKING CAPITAL INVESTMENT Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1 500 batteries a day at a cost of $6 per battery formaterials and labor. It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days.

a. What is the length of Prestopino’s cash conversion cycle?

b. At a steady state in which Prestopino produces 1,500 batteries a day, what amount of working capital must it finance?

c. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days?

d. Prestopino’s management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to 20 days and to increase its daily production to 1,800 batteries. However, the new process would cause the cost of materials and labor to increase to $7. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?

a.

Summary Introduction

To determine: The Length of the cash conversion cycle.

Working capital:

Working capital speculation is the measure of cash, require to extend business, meet here and now business obligations and cover costs of doing business.

Explanation

Given,

Number of batteries made in a day is 1,500.

Per battery cost is $6.

Raw material convert into battery in 22 days.

Customer pays for battery within 40 days.

Supplier supply batteries within 30 days.

Formula to calculate the length of the cash conversion cycle:

Cashconversioncycle=(Daysinventoryoutstanding+Dayssalesoutstanding

b.

Summary Introduction

To determine: The amount which must be financed by the P.

c.

Summary Introduction

To determine: The amount by which P can reduce its working capital financing.

d.

Summary Introduction

To determine: The length of the cash conversion cycle and working capital financing requirement.

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