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In: Finance

CASH CONVERSION CYCLE Parramore Corp has $13 million of sales, $2 million of inventories, $4 million...

CASH CONVERSION CYCLE

Parramore Corp has $13 million of sales, $2 million of inventories, $4 million of receivables, and $2 million of payables. Its cost of goods sold is 70% of sales, and it finances working capital with bank loans at an 6% 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 7% each and increase its payables by 7%, 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 7% each and increase its payables by 7%, 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.
    $

Solutions

Expert Solution

Cash conversion cycle is the period of time is takes for the company to convert its inventory into sales and conversion of sales into cash
Formula to calculate cash conversion cycle
Cash conversion cycle = Inventory conversion period + Average collection period - Average payable period
Calculation of inventory conversion period
Inventory conversion period Inventory/Cost of goods sold per day
Inventory conversion period 2000000/((13000000*0.70)/365) 80.22 days
Average collection period Accounts receivables/Sales per day
Average collection period 4000000/(13000000/365) 112.31 days
Average payable period Payables/Cost of goods sold per day
Average payable period 2000000/((13000000*0.70)/365) 80.22 days
Cash conversion cycle 80.22+112.31-80.22 112.31 days
Calculation of new cash conversion cycle
New inventory 2000000*0.93 $1,860,000
New accounts receivable 4000000*0.93 $3,720,000
New payable 2000000*1.07 $2,140,000
Inventory conversion period Inventory/Cost of goods sold per day
Inventory conversion period 1860000/((13000000*0.70)/365) 74.60 days
Average collection period Accounts receivables/Sales per day
Average collection period 3720000/(13000000/365) 104.45 days
Average payable period Payables/Cost of goods sold per day
Average payable period 2140000/((13000000*0.70)/365) 85.84 days
Cash conversion cycle 74.60+104.45-85.84 93.22 days
New conversion cycle is 93.22 days
Calculation of amount of cash freed up
Inventory (Old inventory conversion period - New inventory conversion period)*Cost of goods sold per day
Inventory (80.22-74.60)*((13000000*0.70)/365)
Inventory $140,000.00
Receivables (Old collection period - New collection period)*Sales per day
Receivables (112.32-104.45)*(13000000/365)
Receivables $280,000.00
Payables (Old payable period - New payable period)*Cost of goods sold per day
Payables (80.22-85.84)*(13000000*0.70)/365)
Payables $140,000.00
Cash freed up = Inventory + receivables - Payables
Cash freed up = 140,000+280000-140000
Cash freed up $280,000.00

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