Working capital investment

Problem 166

Working capital investment

Prestopino Corporation produces motorcycle batteries. Prestopino turns out 2,200 batteries a

day at a cost of $4 per battery for materials and labor. It takes the firm 22 days to convert

raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the

batteries, and the firm generally pays its suppliers in 30 days. Assume 365 days in year for

your calculations.

a. What is the length of Prestopino's cash conversion cycle? Round your answer to two

decimal places.

days

b. At a steady state in which Prestopino produces 2,200 batteries a day, what amount of

working capital must it finance? Round your answer to the nearest cent.

$

c. By what amount could Prestopino reduce its working capital financing needs if it was able

to stretch its payables deferral period to 36 days? Round your answer to the nearest cent.

$

d. Prestopino's management is trying to analyze the effect of a proposed new production

process on its working capital investment. The new production process would allow

Prestopino to decrease its inventory conversion period to 15 days and to increase its daily

production to 2,450 batteries. However, the new process would cause the cost of

materials and labor to increase to $9. Assuming the change does not affect the average

collection period (40 days) or the payables deferral period (30 days), what will be the

length of its cash conversion cycle and its working capital financing requirement if the

new production process is implemented? Round your answers to two decimal places.

Cash conversion cycle  _ _ ?        days

Working capital financing $ ?