Cash Conversion Cycle and Financing Required
Lunar Calendar Company is analyzing the performance of its cash management department. The
firm has inventory that turns 7.2 times per year, an average payment period of 40 days, and an
average collection period of 60 days. The firm’s total annual outlays are $2,500,000. (Assume a
365-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. If
the firm can earn 9% on its short-term investments, what recommendation would you make to the
firm regarding the lockbox system?
