Float Simon Corporation has daily cash receipts of $64,000. A recent analysis of
ID: 1208841 • Letter: F
Question
Float Simon Corporation has daily cash receipts of $64,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 3 days. Once received, the payments are processed in 2.5 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banking system.
a. How much collection float (in days) does the firm currently have?
b. If the firm’s opportunity cost is 9%, would it be economically advisable for the firm to pay an annual fee of $16,800 to reduce collection float by 3 days? Explain why or why not.
Explanation / Answer
Ans (a) 3 days.
Ans (b) Yes, the firm should pay annual fee of $16,800 as it will reduce the collection float by 3 days.
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