Parramore Corp has $12 million of sales, $2 million of inventories, $2 million of receivables,...

Question:

Parramore Corp has $12 million of sales, $2 million of inventories, $2 million of receivables, and $2 million of payables. Its cost of goods sold is 80% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in a year for your calculations.

a. 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?

b. 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?

c. 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?

Cash Conversion Cycle(CCC) :

Number of days it takes a company to generate cash flow with its assets. A company's cash is tied up with its inventory investments and from its receivables. Similarly company's creditors also provide some payable deferral period. Therefore cash conversion cycle is given as

Cash Conversion Cycle = Inventory Conversion period + Average collection period- payable deferral period

A company with least possible CCC is able to generate more cash flow with its assets.

Answer and Explanation: 1

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Cash Conversion Cycle = Inventory conversion period + Average collection period -

Payables deferral...

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Operating Cycle & Cash Cycle: Definition & Calculations

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Chapter 17 / Lesson 2
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The operating cycle and cash conversion cycle are both tools to evaluate the timeline of when a business will become profitable. Explore the calculations of each, and identify their importance to a business.


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