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For Nibong Prawn Paste Enterprise (NPPE), the average age of accounts receivable (AAR) is 60 days, the average age of accounts payable (AAP) is 45 days, and the average age of inventory (AAI) is 72 days
For Nibong Prawn Paste Enterprise (NPPE), the average age of accounts receivable (AAR) is 60 days, the average age of accounts payable (AAP) is 45 days, and the average age of inventory (AAI) is 72 days. Assume a 365-day year.
a. The length of the company’s cash conversion cycle (CCC) is __ days.
b. Based on the CCC calculated in (a) above, if the forecasted sales turnover is $5 million the working capital requirement (WCR) of NPPE is $__.
c. If NPPE is able to reduce its AAI to 65 days; maintain its AAR at 60 days, stretch its AAP to 60 days and maintain the same forecasted sales turnover of $5 million, the new CCC is _____days and the new WCR is $___.
d. Which of the following are TRUE about the impacts of the change in the CCC of NPPE?
Select one:
A. The WCR would be reduced to $310,000
B. NPPE’s trade creditors can be said to be financing part of its WCR by allowing the company an extension of credit
C. NPPE can also use the reduction in WCR for other viable investment that can provide a reasonable return
D. All of the above
Expert Solution
Answer:
a) cash conversion cycle: Account receivable days + Inventory days - Account payable days
cash conversion cycle: 60 + 72 - 45 days
cash conversion cycle: 87 days
b) Net working capital requirement = (Cash conversion cycle * Sales turnover)/365
Net working capital requirement = (87 * $5,000,000)/365
Net working capital requirement = $1,191,780.82
c)
Updated cash conversion cycle: 60 + 65 - 60 days
Updated cash conversion cycle: 65 days
New Working capital requirement = (Cash conversion cycle * Sales turnover)/365
Net working capital requirement = (65 * $5,000,000)/365
Net working capital requirement = $890,410.96
d) Answer is Option B
NPPE’s trade creditors can be said to be financing part of its WCR by allowing the company an extension of credit
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