Cash conversion cycle: cash freed up and pre-tax profit.
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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 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)? 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?
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Solution Summary
This solution is comprised of a detailed explanation of the cash conversion cycle (CCC) formula. Supplemented with tables and more than 400 words of text, this step-by-step explanation of this complicated topic provides students with a clear perspective of CCC, its connection with freed up cash, and how it affects pre-tax profits.
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