Question

Please be organized and highlight or bold the answers because this is the 2nd time I am posting this question

Parramore Corp has $18 million of sales, $1 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 85% of sales, and it finances working capital with bank loans at an 7% 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.
   ________ days
2. 
   
3. If Parramore 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? Do not round intermediate calculations. Round your answer to two decimal places.
   ________ days
4. 
   
5. How much cash would be freed up, if Parramore could lower its inventories and receivables by 10% each and increase its payables by 10%, 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.
   $__________
6. 
   
7. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 10% each and increase its payables by 10%, 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.
   $________

Answer 1

1. Inventory Conversion period = Inventory / COGS per Day = 1000000 / (18000000 * 85%/365) = 23.86 Days

Average collection period = Receivables * 365 / Sales = $3000000 * 365 / 18000000 = 60.83 Days

Average Payment Period = Payables * 365 / COGS = 1000000 * 365 / (18000000*85%) = 23.86 Days

Parramore's cash conversion cycle = 23.86 + 60.83 - 23.86 = 60.83 Days

2. Inventory Conversion period = Inventory / COGS per Day = 900000 / (18000000 * 85%/365) = 21.47 Days

Average collection period = Receivables * 365 / Sales = $2700000 * 365 / 18000000 = 54.75 Days

Average Payment Period = Payables * 365 / COGS = 1100000 * 365 / (18000000*85%) = 26.24 Days

Parramore's cash conversion cycle = 21.47 + 54.75 - 26.24 = 49.98 Days

3. Cash Freed Up = (23.86 - 21.47) * 18000000 * 85% / 365 + (60.83 - 54.75) * 18000000 / 365 - (26.24 - 23.86) * 18000000 * 85% / 365

Cash Freed Up = $100000 + $300000 - $100000 = $300000.00

d. Pre tax profit change = Cash Freed Up * Working capital Rate = $300000 * 7% = $21000