1. The cash conversion cycle (CCC) can be calculated as:
CCC = DIO + DSO - DPO
where DIO is Days Inventory Outstanding, DSO is Days Sales Outstanding, and DPO is Days Payable Outstanding.
Given that the company maintains 44 days of sales in inventory (DIO = 44), 20% of sales are made on net 30 credit terms (DSO = 30 x 0.2 = 6), and accounts payable averaged $4.2 million over the past 12 months (DPO = (4.2/33.7) x 365 = 45.4), we can calculate the CCC as:
CCC = 44 + 6 - 45.4
CCC = 4.6 days
Therefore, the company's cash conversion cycle is 4.6 days.
2. To determine whether the proposed marketing strategy creates value for the firm, we need to calculate the net present value (NPV) of the strategy. The formula for NPV is:
NPV = (CF1 / (1+r)^1) + (CF2 / (1+r)^2) + ... + (CFn / (1+r)^n)
where CF is the cash flow, r is the cost of capital, and n is the number of years. In this case, the cash flows are as follows:
Year 0:
Initial outlay = -$100,000
Year 1:
Increase in sales (3% of $33.7 million) = $1,011,000
Increase in payables (4% of $33.7 million) = -$1,348,000
Increase in receivables (3% of $33.7 million) = $1,011,000
Year 2:
Increase in payables (4% of $34.711 million) = -$1,388,440
Increase in receivables (3% of $34.711 million) = $1,041,330
Plugging these values into the NPV formula, we get:
NPV = (-$100,000 / (1+0.13)^0) + ($1,011,000 / (1+0.13)^1) + (-$1,348,000 / (1+0.13)^1) + ($1,011,000 / (1+0.13)^1) + (-$1,388,440 / (1+0.13)^2) + ($1,041,330 / (1+0.13)^2)
NPV = -$6,031
Since the NPV is negative, the proposed marketing strategy does not create value for the firm.