Neon Light Company of Kansas City ships lamps and lighting appliances throughout

Question

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by one and one-half days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida. a. If Neon Light Company has $2.00 million per day in collections and $1.00 million per day in disbursements, how many dollars will the cash management system free up? If Neon Light Company can earn 9 percent per annum on freed-up funds, how much will the income be c. If the total cost of the new system is $375,000, should it be implemented? No Yes

Explanation / Answer

ANSWER:
a. $2,000,000 daily collections × 1.5 days speed up =
$3,000,000 additional collections
$1,000,000 daily disbursements ×.5 days slow down =
$500,000 delayed disbursements
$3,000,000 additional collections
$,500,000 delayed disbursements
$3,500,000 freed-up funds

b. $3,500,000 freed-up funds
x 9% interest rate
$ 315,000 interest on freed-up cash

c. No. The income of 315,000 is 60,000 less than the cost of 375,000.

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