Tryst Energy Inc. has an average age of inventory of 65 days, an average collection period of 60 days and an average payment period of 65 days. The firm's total annual outlays for operating cycle investments are $3.65 million. Assuming a 365-day year, how much financing is required to support its cash conversion cycle?

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andromache andromache · Answer 1 · 2019-08-28T07:13:43+02:00

Answer:

The $600,000 amount is required to financing so that the cash conversion cycle can be supported

Explanation:

For computing how much financing is required, first we have to compute the cash conversion payable which is shown below:

Cash conversion cycle = Average age of inventory + Average collection period - average payment period

= 65 + 60 - 65

= 60 days

Now, we have to apply the financing formula which is shown below:

= Firm total annual outlays for operating cycle investment × cash conversion cycle ÷ total number of days in a year

= $3,650,000 × 60 days ÷ 365

= $3,650,000 × 0.16438

= $600,000

Hence, the $600,000 amount is required to financing so that the cash conversion cycle can be supported