IBF 5040 Module 7 Working Capital and Credit Policy Example

Course	IBF-5040 Corporate and Managerial Finance
Module	Module 7
Paper type	Module 7 written assignment: the cash cycle and credit terms
Length	About 585 words, 5 pages
Format	APA 7 student paper
School	Thomas Edison State University
Program	MBA in Finance
Updated	October 2026

Free sample paper for IBF 5040 Module 7

104 Days of Cash: Working Capital and a Credit Terms Decision at Passaic Precision

Student Name

MBA in Finance, Thomas Edison State University

IBF-5040: Corporate and Managerial Finance

Mentor Name

Month Day, Year

What this page is doingThe title states the company's cash conversion cycle, the measure that frames every working capital decision in the paper.

104 Days of Cash: Working Capital and a Credit Terms Decision at Passaic Precision

Introduction

Module 2 found that Passaic's inventory ties up 91 days of cost of goods sold and that better inventory management could release about $20 million. This assignment measures the whole cycle and tests a proposal that would lengthen it: a sales manager wants to offer net 45 terms to win business from larger aerospace customers who demand longer payment periods. The sales manager argues that losing these accounts to competitors offering longer terms would cost more than carrying the receivables. The analysis below tests that claim with the company's own figures.

The Cash Conversion Cycle

From the day Passaic pays for bar stock to the day it collects from customers, about 104 days pass. Every day of that cycle must be financed. Moyer et al. (2018) explain that shortening the cycle frees cash for investment or debt repayment without changing profit.

Component	Calculation	Days
Days inventory outstanding	$112 million / $448 million x 365	91
Plus days sales outstanding	$88 million / $640 million x 365	50
Less days payables outstanding	$46 million / $448 million x 365	37
Cash conversion cycle	\| 104

The Credit Terms Proposal

The sales manager estimates that net 45 terms would raise sales by 4 percent, $25.6 million, mostly from new aerospace customers. Days sales outstanding would rise from 50 to about 62 on all sales, since existing customers would also take the longer terms.

Added receivables equal sales of $665.6 million times 62 days over 365, about $113.1 million, less the current $88 million, or $25.1 million; they are carried at the company's 9 percent hurdle rate. On these estimates the change adds about $2.9 million a year before tax.

Effect	Amount, $ millions a year
Added contribution: $25.6 x 25% margin after variable costs	6.4
Cost of carrying added receivables: $25.1 x 9%	(2.3)
Bad debts on new sales at 3%	(0.8)
Cost of carrying added inventory: $4.5 x 9%	(0.4)
Net pretax gain	2.9

What this page is doingCharging the extra receivables at the firm's cost of capital, and including the inventory needed for new sales, makes the comparison complete rather than counting only the sales gain.

Risks and Conditions

The result depends on the sales estimate and on bad debts. If new sales came in at half the estimate, the gain would nearly disappear, because the cost of longer terms on existing customers would remain. Petersen and Rajan (1997) found that firms often extend trade credit to customers they know well and can monitor; Passaic should therefore offer net 45 only to qualifying aerospace accounts with strong credit ratings, not to all customers, which would cut the carrying cost on existing sales.

Working Capital Priorities

The analysis also points to a larger opportunity. Reducing inventory from 91 to 75 days would release about $20 million and save about $1.8 million a year at a 9 percent carrying cost, comparable to the credit proposal's gain and without its risks. Payables could be lengthened modestly by negotiating terms with steel suppliers. The company's working capital priorities should be inventory first, then selective credit terms. Shleifer and Vishny (1997) note that cash tied up in operations is less visible to outside investors than cash on the balance sheet, so freeing it also gives the board more choices when it next discusses payouts.

Conclusion

Passaic's 104-day cash conversion cycle is long. Extending credit terms to net 45 would add about $2.9 million a year on the sales manager's estimates, but the gain is sensitive to volume and should be limited to qualifying customers. Cutting inventory days offers a similar benefit with less risk and should come first.

References

Moyer, R. C., McGuigan, J. R., & Rao, R. P. (2018). Contemporary financial management (14th ed.). Cengage.

Petersen, M. A., & Rajan, R. G. (1997). Trade credit: Theories and evidence. Review of Financial Studies, 10(3), 661-691. https://doi.org/10.1093/rfs/10.3.661

Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x

IBF 5040 Module 7 instructions, in plain terms

Assignment seven of IBF-5040 turns to the cash tied up in operations and the terms a firm offers its customers. Expect to compute the cash conversion cycle, evaluate inventory and receivables policies and analyze a change in credit terms by comparing added profit with the costs of carrying receivables, bad debts and inventory. Questions may also cover short-term financing sources such as lines of credit and trade credit. Show each component in a table, state the carrying cost rate and explain which customers a policy change affects. Use year-end balances unless the question gives averages, and say which you used. When analyzing credit terms, state the variable cost ratio, the carrying cost rate and the expected bad debt rate. Explain which customers will take the new terms, because the cost of longer terms on existing sales often decides the answer. Close with a recommendation and the conditions that should accompany it.

How this IBF 5040 Module 7 example is built

The paper links back to the inventory finding in Module 2. A table computes the cash conversion cycle from the company's figures. A credit proposal section quantifies added contribution, receivables carrying cost, bad debts and inventory in a table, with the receivables calculation shown in the text. A risks section tests the estimate and uses research on trade credit to recommend limiting the terms to qualifying customers. A priorities section compares the credit decision with inventory reduction. The receivables arithmetic is spelled out in prose so a reader can redo it from the tables. The paper does not accept the proposal at face value; it tests the estimate and suggests a narrower policy. Ending with a comparison between credit terms and inventory reduction places the decision within the company's wider working capital strategy.

IBF 5040 Module 7 rubric: what earns full marks

Mentors grade this assignment on correct cash conversion cycle calculations, a complete credit policy analysis and sound recommendations. Answers that include the longer terms' effect on existing customers, the cost of carrying receivables at the cost of capital and the extra inventory show careful analysis. Testing sensitivity and recommending conditions demonstrates judgment. Comparing the proposal with other working capital improvements shows strategic thinking. Mentors look for a cash conversion cycle computed with consistent denominators, cost of goods sold for inventory and payables and sales for receivables. Papers that state the carrying cost rate and explain why it equals the cost of capital show understanding of opportunity cost. A recommendation with clear conditions, such as limiting terms to customers with strong credit, earns more than an unconditional yes or no.

IBF 5040 Module 7 help from the desk

Students lose points by counting only the new sales' receivables, by using sales instead of contribution as the benefit or by forgetting bad debts and inventory. Apply the new collection period to all customers who will take it. Use contribution margin for the benefit. Charge carrying costs at the cost of capital. Test the result with lower sales. Others mix denominators, dividing inventory by sales rather than cost of goods sold, which understates the inventory period. Check that each day measure uses the right base. Rerun the net 45 decision with half the promised sales and say what you will monitor. A free first sample on your own IBF-5040 Module 7 problems is available on request.

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IBF 5040 Module 7 questions, answered

Where can I find a free IBF 5040 Module 7 sample paper?

Cash conversion cycle and a net 45 credit terms test for the parts maker are worked above.

What is the cash conversion cycle?

For Passaic, 91 inventory days plus 50 receivable days less 37 payable days: 104 days it must finance.

How is a change in credit terms evaluated?

By comparing added contribution with the cost of carrying more receivables, additional bad debts and any extra inventory.

Why does extending credit terms affect existing customers?

Existing customers usually take the longer terms too, raising receivables on sales the firm would have made anyway.

How can a firm shorten its cash conversion cycle?

By reducing inventory, collecting receivables faster or paying suppliers later within agreed terms.

IBF 5040 Module 7 Written Assignment: Working Capital and a Change in Credit Terms Example