Question 3: The Liverpool Corporation is trying to determine the effect of its inventory turnover ratio and collection cycle on its cash flow cycle. Liverpools 2008 sales (all on credit) were $180,000, and it earned a net profit of 5%, or $9,000. The costs of goods sold equals 60% of sales. Inventory was turned over eight times during the year, and the collection cycle was 36 days. The firm had fixed assets totaling $40,000. Liverpools payment cycle is 30 days.

a. Calculate Liverpools cash conversion cycle. [2 Marks]

b. Assuming Liverpool holds negligible amounts of cash and marketable securities; calculate its

total asset turnover and return on assets. [2 Marks]

c. Suppose Liverpools managers believe that the inventory turnover can be raised to 10. What

would Liverpools cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 10 for 2008? [4 Marks]