Question

Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash.  It is estimated that establishing these collection centers would reduce the average collection time by 2 days. 

 

1)     If the company currently averages $50,000 in collections per day, how many dollars will this suggested cash management system free up?

 

 

2)     If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?

 

3)     Do the numbers suggest that this new system should be implemented if its total annual cost is $8000? Explain.

Answer 1

1) If the company currently averages $50,000 in collections per day, how many dollars will this suggested cash management system free up? 

Amount of Dollars = Daily Collections Collection Time 50,000*2 = $100,000 

2) If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?

 Yearly Savings - Suggested Cash Management Free Up*Interest Rate 100,000*0.06 = $6,000 

3) Do the numbers suggest that this new system should be implemented if its total annual cost is $8000? Explain.

 Since the total annual cost is $8,000, this new system should not be implemented. Money that could be saved each year in interest expense is $6,000, which would be lower than its total annual cost of $8,000.