Chapter 16, Problem 6P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# WORKING CAPITAL INVESTMENT Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of $7 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Pasha 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 Pasha's cash conversion cycle? b. At a steady state in which Pasha produces 1,400 batteries a day what amount of working capital must it finance? c. By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 33 days? d. Pasha'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 Pasha to decrease its inventory conversion period to 17 days and to increase its daily production to 2,400 batteries. However, the new process would cause the cost of materials and labor to increase to$12. 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 cash conversion cycle.

Introduction:

Cash Conversion Cycle: It refers to the time period which starts from the production of the products to selling of the products and lasts until the time the customer receives the cash.

Working capital investment: The working capital refers to that part of the capital of the business which is used for the operational activities of the business. The investment of that capital in the business is referred as the working capital investment.

Explanation

Given information:

The produce is of 1,400 batteries a day at cost of \$7 per battery for materials and labor.

The inventory conversion period is 22 days.

The average collection period is 40 days.

The payment deferral period is 30 days.

Calculation of the cash conversion cycle:

The formula to calculate the cash conversion cycle is,

CashāConversionāCycle=(Inventoryāconversionāperiod+Averageācollectionā

b.

Summary Introduction

To determine: The amount of working capital must the company finance.

c.

Summary Introduction

To determine: The reduction in the amount of working capital financing needs.

d.

Summary Introduction

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

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