Question

Chasteen Hall currently has 65 days in its cash cycle and 151 days in its operating cycle. The firm purchases its inventory from one supplier. This supplier has offered a 5 percent discount to the firm if it will pay for its purchases within 15 days instead of the normal 39 days. If the firm opts to take advantage of the discount offered, its new operating cycle will be _____ days and its new cash cycle will be _____ days.

Answer 1

To take advantage of a supplier discount, Chasteen Hall considers reducing its accounts payable period from 39 days to 15 days. This change would decrease its cash cycle from 65 days to 136 days while the operating cycle would remain unchanged at 151 days.

Step-by-step explanation:

The question involves calculating the new operating cycle and cash cycle for Chasteen Hall if it takes advantage of a supplier discount. The operating cycle is the amount of time it takes for a company to purchase inventory, sell it, and collect the cash from the sale. The cash cycle is the operating cycle minus the accounts payable period. Currently, Chasteen Hall has a cash cycle of 65 days and an operating cycle of 151 days, with a normal accounts payable period of 39 days.

If the firm starts paying its supplier within 15 days to receive a 5 percent discount, the accounts payable period decreases from 39 days to 15 days, shortening the cash cycle (since the cash cycle is the operating cycle minus the accounts payable period). To determine the new cash cycle, subtract the new accounts payable period from the existing operating cycle: 151 days (operating cycle) - 15 days (new accounts payable period) = 136 days (new cash cycle). However, the operating cycle remains the same because it includes the entire duration from the inventory purchase to cash collection, which is not affected by the change in payment terms.