Cash conversion cycle
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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.
1. What is Primrose's cash conversion cycle (CCC)?
2. If Primrose could lower its inventories and receivables by 10 percent each and increase its payables by 10 percent, all without affecting either sales or cost of goods sold, what would the new CCC be?
3. How much cash would be freed up?
4. How would that affect pre-tax profits?
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Response provides steps to compute the Cash conversion cycle
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Cash conversion cycle
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.
1. What is Primrose's cash conversion cycle (CCC)?
Operating Cycle (OC) = Inventory Conversion Period + Receivables Conversion Period
Inventory ...
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