Question

Parramore Corp has $20 million of sales, $3 million of inventories, $2 million of receivables, and $1 million of payables. Its cost of goods sold is 75% 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-If Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, 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

3-How much cash would be freed up, if Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, 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. $

4-By how much would pretax profits change, if Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, 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]	DSO [Days' sales outstanding] = 2*365/20 =	36.50	days
	DIO [Days' inventory outstanding] = 3*365/(20*75%) =	73.00	days
	DPC [Days' payables outstanding] = 1*365/(20*75%) =	24.33	days
	CCC = DSO+DIO-DPO = 36.50+73.00-24.33 =	85.17	days
2]	DSO [Days' sales outstanding] = 2*88%*365/20 =	32.12	days
	DIO [Days' inventory outstanding] = 3*365*88%/(20*75%) =	64.24	days
	DPC [Days' payables outstanding] = 1*112%*365/(20*75%) =	27.25	days
	CCC = DSO+DIO-DPO =	69.11	days
3]	The cash freed up can be calculated as below:	Before Change	After Change
	Inventories	$         3,000,000	$     2,640,000
	Receivables	$         2,000,000	$     1,760,000
	Payables	$         1,000,000	$     1,120,000
	NWC	$         4,000,000	$     3,280,000
	Cash freed up = 4000000-3280000 =	$ 720,000
4]	Increase in pretax savings = Savings in bank interest = 720000*7% =	$ 50,400