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 2.5 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 11%, would it be economically advisable for the firm to pay an annual fee of $17,500 for a lockbox system to reduce collection float by 2 days? c. What would the company's opportunity cost have to be to make the $17,500 fee worthwhile? a. The amount of collection float (in days) the firm currently has is days. (Round to one decimal place.)

Answer 1

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PV, FV, ANNUITY (Autosaved) - Microsoft Excel (Product Activation Failed) Review View Add-Ins Formulas Data - 2x Σ AutoSum : A = = = Dr General 11AA A Wrap Text Merge & Center E 8.9 $ - % Number Fill 2 Clear Formatting as Table Styles Styles Sort & Filter Editing Find & Select Alignment Cells File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter B I U - D Clipboard Font AY114 - five AR AS AT 99 100 101 AU AV AW AX AY AZ BA BB BC BD BE BF COLLECTION FLOAT = MAIL TIME + PROCESSING TIME + CLEARING TIME 2.5 +2.5+2= 7 DAYS 102 103 SAVINGS = 65000 X 11% X 2 DAYS = 14300 104 105 THE FIRM SHOULD NOT ACCEPT THE PROPOSAL BECAUSE COSTS EXCEED THE SAVINGS SAVINGS (14300) ARE LOWER THAN COST OF LOCKBOX SYSTEM (17500), DO NOT ACCEPT THE SYSTEM 106 107 108 109 SAVINGS = 65000 X RATE X 2 DAYS 17500 = 65000 X RATE X 2 DAYS RATE= 17500/(2 X 65000) RATE = 13.46% 110 111 112 113 114 OPPORTUNITY COST = 13.46% 115 116 H 117 N Rea CAP STRU VALUE profit margin loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPONPER APR CPI ear FVA 0 0 LOAN OPTIONSpv, fv, annuity ferences pva 52 53 BOJ 130% 0 + 2 .B 9 * 10 ENG 10-12-2019