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    Cash Freed Up for Primrose Corp

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    Primrose Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80 percent of sales, and it finances working capital with bank loans at an 8 percent rate.

    If Primrose lowered inventories and receivables by 10% each and increased payables by 10%; If Sales and COGS remain the same, then how much cash would be freed up? Hint: The cash freed up is not $400,000.

    a. $409,000
    b. $427,000
    c. $358,000
    d. None of the above

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    Solution Preview

    Sales $15m
    Inventories $2m
    Receivables $3m
    Payables $1m
    Cost of goods sold (80% of sales) $12m
    Finances working capital with bank loans at an 8% rate.

    What is Primrose's cash conversion cycle (CCC)?

    Old CCC.

    Cash conversion cycle (CCC) = Inventory conversion period + Average collection period - Payables deferral period.

    Inventory conversion period = Inventory / Cost of goods sold per day
    = $2,000,000 / ($12,000,000 / 365) = 60.833 days.

    Average collection period = ACP (or DSO) = Receivables / (sales / 365)
    = $3,000,000 / ($15,000,000 / 365) = 73 days.

    Payables deferral period = Payables / Purchases per day = Payables / (Cost of goods ...

    Solution Summary

    The solution examines cash freed up for Primrose Corp. The finances working capital with bank loans is 8 percent rate.