Question

Parramore Corp has $10 million of sales, $1 million of inventories, $4 million of receivables, and $3 million of payables. Its cost of goods sold is 85% 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. 60.12 days

2. If Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, 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. 21.99 days

3. How much cash would be freed up, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, 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. $ 240003.78

4. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, 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. $ 21600.34

Answer 1

Answer 1:

Cash conversion cycle (CCC) = DSO + DIO - DPO

DSO = 365 / (Sales / Average Receivables) = 365 / (10000000 / 4000000) = 146 days

DIO = 365 / (Cost of Goods sold / Average Inventory) = 365 / (10000000 * 85% / 1000000) = 42.941 days

DPO = 365 / (Cost of Goods sold / Average payable) = 365 / (10000000 * 85% / 3000000) = 128.824 days

CCC = 146 + 42.941 - 128.824 = 62.12 days

Cash conversion cycle (CCC) = 62.12 days

Answer 2:

DSO = 365 / (10000000 / (4000000 *(1-11%))) = 129.940 days

DIO = 365 / (10000000 * 85% / (1000000 *(1 - 11%))) = 38.218 days

DPO = 365 / (10000000 * 85% / (3000000 * (1 + 11%))) = 142.994 days

CCC = 129.940 + 38.218 - 142.994 = 25.16 days

Cash conversion cycle (CCC) = 25.16 days

(Answer does not match with 21.99 days as given in the question)

This can also be calculated as =146* (1 - 11%) +42.941* (1 - 11%) -128.824* (1 + 11%) = 25.16 days

Answer 3:

Cash that would be freed up = 4000000 * 11% + 1000000 * 11% - 3000000 * 11% = $220,000

Cash that would be freed up = $220,000

Answer 4:

Cash that would be freed up = $220,000

Rate of bank's working capital loans = 9% rate

Increase in pretax profit = Saving in interest = 220000 * 9% = $19,800

Increase in pretax profit = $19,800