Cash Conversion Cycle and Financing Required

| June 14, 2018

Cash Conversion Cycle and Financing RequiredLunar Calendar Company is analyzing the performance of its cash management department. Thefirm has inventory that turns 7.2 times per year, an average payment period of 40 days, and anaverage collection period of 60 days. The firm’s total annual outlays are $2,500,000. (Assume a365-day year.)a.Calculate the firm’s operating and cash conversion cycles.b.Calculate the amount of resources needed to support the firm’s cash conversion cycle.c. The firm is considering speeding the collection of accounts receivable by using lockboxes.The lockboxes would reduce the average collection period by 4 days and cost $2,000 in fees. Ifthe firm can earn 9% on its short-term investments, what recommendation would you make to thefirm regarding the lockbox system?

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