Wilco's currently has a cash cycle of 43 days.Assume the firm changes its operations such that it decreases its receivables period by 2 days,increases its inventory period by 1 day,and increases its payables period by 3 days.What will be the length of the cash cycle after these changes?

Question

Quizplus · Accepted Answer

Cash cycle = Receivables period + Inventory period - Payables period

Initially, the cash cycle was 43 days.

Now, after the changes,

Receivables period is decreased by 2 days, so it will be = Receivables period - 2 = R - 2
Inventory period is increased by 1 day, so it will be = Inventory period + 1 = I + 1
Payables period is increased by 3 days, so it will be = Payables period + 3 = P + 3

New cash cycle = (R-2) + (I+1) - (P+3) = (R + I - P) - 4

We know that the old cash cycle (R + I - P) was 43 days, so the new cash cycle will be:

New cash cycle = 43 - 4 = 39 days

Therefore, the best choice is C).

Wilco's Currently Has a Cash Cycle of 43 Days