Question

P14-14 (similar to) Question Help Float Simon Corporation has daily cash receipts of $57,000. 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 3 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 8%, would it be economically advisable for the firm to pay an annual fee of $17,200 for a lockbox system to reduce collection float by 3.5 days? c. What would the company's opportunity cost have to be to make the $17,200 fee worthwhile? a. The amount of collection float (in days) the firm currently has is days. (Round to one decimal place.) Enter your answer in the answer box and then click Check Answer. 3 parts Clear All Check Answer remaining

Answer 1

Collection float includes mailing time, processing delay and availability delay.

Considering above

Collection float = mailing time + processing delay + availability delay

= 3+3+3 = 9 days

b.) If collection float reduced by 3.5 days

Opportunity cost = 8%

Annual earnings = collection float redn. × Daily receipt × opp. Cost

= 3.5×57000×8% =$ 15,960

Hence annual earning by reducing collection float ($ 15,960) is less than lockbox system ($ 17,200). Hence economically it is not advisble for company to install lockbox system.

c.) Let the opportunity cost be x.

Then,

3.5× 57000× x = 17200

x = 8.62155%

Hence, opportunity cost greater than or equal to 8.62155 would makethe lockbox system feasible costing $ 17,200.

  

Answer 2

SOLUTION :

a.

Float 

= mail receipt time + Processing time + bank clearance time

= 3 + 3 + 3 

= 9 days. (ANSWER) 

This means payment made by customers are realised in 9 days and the collection of 9 days will remain blocked in the system.  

b.

Cash receipts in one day = $57000 .

Collection in 3.5 days = $57000 * 3.5 = $199500 .

Collection float period is reduced by 3.5 days means cash of $199500 will not be blocked in the system and will be available to the company.

So, 

Saving of interest on this cash-increase in cash availability throughout the year

= 199500 * 0.08

= 15960 ($).

Bank’s fees for the better system = 17200 ($)

Hence, to make the bank’s package worthwhile,

Opportunity cost should be more than

17200 / 199500 *100 % 

= 8.62%  (ANSWER).