Float Simon Corporation has daily cash receipts of $58,000. A recent analysis of
ID: 2802985 • Letter: F
Question
Float Simon Corporation has daily cash receipts of
$58,000. 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
2 days. After payments are deposited, it takes an average of
2 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
$17,300 for a lockbox system to reduce collection float by
4days?
Explanation / Answer
a)
Float = 2.5 + 2 + 2 = 6.5 days
b)
Amount freed by reducing float = 58000*(6.5 - 4) = 145000
Annual cost of lock box system should be = 145000*9% = 13050
13050 < 17300
It is econmically Not advisable
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