Question

Parramore Corp has $17 million of sales, $3 million of inventories, $4 million of receivables, and $3 million of payables. Its cost of goods sold is 65% of sales, and it finances working capital with bank loans at an 6% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.

What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places.
days

Answer 1

Parramore's cash conversion cycle (CCC) is 85.88 days.

Step-by-step explanation:

The cash conversion cycle (CCC) refers to a metric that is used to express the time or number of days a firm takes to convert its inventory and other investments resources into cash flows from sales.

CCC has three components: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO). CCC can therefore be calculated using these three components as follows:

CCC = DIO + DSO - DPO ........................... (1)

We need to calculate each of these components first as follows:

DIO = (Inventories / Cost of good sold) * 365 = [3 / (65% * 17)] * 365 = 99.0950226244344

DSO = (Receivables / Sales) * 365 = (4 / 17) * 365 = 85.8823529411765

DPO = (Payable / Cost of good sold) * 365 = [3 / (65% * 17)] * 365 = 99.0950226244344

Substituting all the values into equation (1), we have:

CCC = 99.0950226244344 + 85.8823529411765 + 99.0950226244344 = 85.88 days.

Therefore, Parramore's cash conversion cycle (CCC) is 85.88 days. That is, it takes Parramore Corp 85.88 days to convert its inventory and other investments resources into cash flows from sales.