Question

ramore Corp has $15 million of sales, $3 million of inventories, $3.5 million of receivables, and $2 million of payables. Its cost of goods sold is 70% of sales, and it ances working capital with bank loans at a 6% rate. Assume 365 days in year for your calculations. 1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. days 2. If Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, all without affecting sales or cost of goods sold, what would be the new CCC? Do not round intermediate calculations. Round your answer to two decimal places. days 3. How much cash would be freed up, if Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, all without affecting sales or cost of goods sold? Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar. $ 4. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 12% each and increase its payables by 12%, all without affecting sales or cost of goods sold? Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar. $

Answer 1

Parramore Corp's CCC involves calculating the inventory conversion period, receivables collection period, and payables deferral period. Changes in inventories, receivables, and payables impact the CCC and can affect the amount of cash freed up and pretax profits, depending on the interest rate of bank loans.

Step-by-step explanation:

To calculate Parramore Corp's cash conversion cycle (CCC), we need to determine its Inventory Conversion Period (ICP), Receivables Collection Period (RCP), and Payables Deferral Period (PDP). The CCC formula is as follows: CCC = ICP + RCP - PDP.

1. The Inventory Conversion Period (ICP) is the time it takes to sell the inventory and is calculated by (Inventories / Cost of Goods Sold) * 365. The Receivables Collection Period (RCP) is the time to collect the receivables and is calculated by (Receivables / Sales) * 365. The Payables Deferral Period (PDP) is the time the company has to pay its suppliers and is calculated by (Payables / Cost of Goods Sold) * 365.

2. If Parramore lowers its inventories and receivables by 12% each and increases its payables by 12%, the new figures would be $2.64 million for inventories, $3.08 million for receivables, and $2.24 million for payables. We recalculate the ICP, RCP, and PDP with these new figures.

3. To determine how much cash would be freed up, we calculate the changes in inventories, receivables, and payables and the effect on net working capital. The freed up cash is the amount by which working capital is reduced.

4. The change in pretax profits would be affected by the interest saved on the reduced bank loans due to lower working capital requirements. With the bank's interest rate at 6%, we calculate the interest saved on the freed-up cash to estimate the change in pretax profits.