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.
d. None of the above
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)?
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 ...
The solution examines cash freed up for Primrose Corp. The finances working capital with bank loans is 8 percent rate.