Nicholas Birdcage Company of Hollywood ships cages throughout the country. Nicho

Question

Nicholas Birdcage Company of Hollywood ships cages throughout the country. Nicholas has determined that through the establishment of local collection centers around the country, he can speed up the collections of payments by one and one-half days. Furthermore, the cash management department of his bank has indicated to him that he can defer his payments on his accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

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a. If the company has $4 million per day in collections and $2 million per day in disbursements, how many dollars will the cash management system free up?

b. If the company can earn 9 percent per annum on freed-up funds, how much will the income be?

c. If the annual cost of the new system s $700,000, should it be implemented?

Explanation / Answer

Part A

Collection freed up = Daily collection x no. of days

                                      = 4 million x 1.50

                                     = 6 million

Payment delayed = 2 million x 0.50

                                    = 1 million

Total amount freed up = 6 million + 1 million

                                                = 7 million

Part B

Total income = amount freed up x Interest rate

                         = 7 million x 9%

                         = 630,000

Part C

Net Income = total income – total expenses

                        = 630,000 - 700,000

                        = -70,000

Since there is net loss from the new system, new system should not be adopted.

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