Primrose Corp has $15million of sales, $2million of inventories, $3million of receivables

and $1million of payables. Its cost of goods sold is 80% of sales and it finances working
capital with bank loans at an 8% rate. What is Primrose's cash conversion cycle (CCC)?

Sales = $15,000,000; Inventory = $2,000,000; A/R = $3,000,000; A/P = $1,000,000;

COGS = 0.8(Sales); Interest on bank loan = 8%

CCC = Inventory conversion period + Average collection period

Payables deferral period.

Inventory
Inventory conversion period = Cost of goods sold per day

$2,000,000
=
[(0.8)($15,000,000)]/365

$2,000,000
= $32,876.7123

= 60.83 days.

Receivable s
Average collection period = Sales/365

$3,000,000
= $15,000,000 /365

= 73 days.

Payables
Payables deferral period = Cost of goods sold/365

$1,000,000
= $32,876.7123

= 30.42 days.

CCC = 60.83 + 73 30.42 = 103.41 days.

If Primrose could lower its inventories and receivables by 10% each and increase its
payables by 10%, all without affecting either sales or cost of goods sold, what would the
new CCC be, how much cash would be freed up and how would that affect pre-tax
profits?

Inventory = $2,000,000 0.9 = $1,800,000.

 A/R = $3,000,000 0.9 = $2,700,000.

A/P = $1,000,000 1.1 = $1,100,000.

$1,800,000
Inventory conversion period = $32,876.7123

= 54.75 days.

$2,700,000
Average collection period = $15,000,000 /365

= 65.70 days.

$1,100,000
Payables deferral period = $32,876.7123

= 33.46 days.

New CCC = 54.75 + 65.70 33.46 = 86.99 days 87 days.

Cash freed up:

Inventory = (60.83 54.75) $32,876.7123 = $199,890.41.

Receivables = (73 65.70) $41,095.8904 = $300,000.

Payables = (33.46 30.42) $32,876.7123 = $99,945.2055.

Cash freed up = $199,890.41 + $300,000 $99,945.2055 = $399,945.2045

$400,000.

$400,000 0.08 = $32,000 increase in pre-tax profit.