Reference no: EM132042219

A firm that generates annual sales of $36M turns over its inventory 5 times each year and has an average payment period of 25 days and an average collection period of 32 days. The firm’s cost of goods sold is 80% of sales and purchases are 50% of cost of goods sold. Assuming a commercial (360-day) year, what is the firm’s total capital investment in the cash conversion cycle? Suppose it costs 18% per year to finance the capital investment in the cash conversion cycle, and therefore the firm would like to reduce it by 12 days. How much money would the firm save if it tried to accomplish this by extending the average payment period by 12 days? The firm could also achieve the same reduction in the cash conversion cycle by cutting the average age of inventory or the average collection period by 12 days. Which of the three alternatives would you recommend and why?