Float Simon Corporation has daily cash receipts of $65,000. A recent analysis of
ID: 2755854 • Letter: F
Question
Float Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5 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 11%, would it be economically advisable for the firm to pay an annual fee of $16,500 to reduce collection float by 3 days? Explain why or why not.
Explanation / Answer
a)
Total collection float = payment period + processing time + clearing time
= 2.50 +1.50 +3
= 7 days
b)
Interest income from the reduction of collection float = daily collection x reduction in collection float x rate of interest
= 65000 x 3 x 11%
= 21450
Yes it is advisable to pay 16500 of annual fees and reduce collection float as benefit is greater than this cost.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.