Question

(Cash management) As CFO of Portobello Scuba Diving Inc., you are asked to look into the possibility of implementing a system to expedite cash receipts from clients. Portobello receives check remittances totaling $24 million in a year. The firm records and processes 15,000 checks in the same period. The National Bank of Brazil has informed you that it could provide the service of expediting checks and associated documents for a unit cost of $0.30 per check. After conducting an analysis, you project that the cash freed up by the adoption of the system can be invested in a portfolio of near-cash assets that will yield an annual before-tax return of 6 percent. The company usually uses a 365-day year in its financial calculations. a. What reduction in check collection time is necessary for Portobello to be neither better nor worse off for having adopted the proposed system? b. How would your solution to part a be affected if Portobello could invest the freed-up balances at an expected annual return of only 3 percent? c. What is the logical explanation for the differences in your answers to part a and part b?

Answer 1

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C W ENG 02:38 30-07-2020 99+ 32 x X 0264 . M N o Р Q R S т U V w Х Y Z 241 242 243 244 245 246 1 remittances = 24 million per year 15000 checks per year lockbox cost = 0.30 per check return = 6% net benefit = daily remittance x reduction in process time x rate net benefit = 24000000/365 x reduction in process time x 6% net benefit = 3945.2055 x reduction in process time 247 248 249 250 251 252 253 254 255 256 257 258 259 260 now lock box cost = 0.30 x 15000 = 4500 to make lockbox system indifferent , lockbox cost = net benefit that is, 4500 = 3945.2055 x reduction in process time ANSWER reduction in process time = 1.14 days [4500/3945.2055] 261 262 263 264 2 now if rate = 3% net benefit = 24000000/365 x reduction in process time x 3% LOAN OPTIONS pv, fv, annuity CAP STRU VALUE PM, PMT loan with points Cr CALCULATOR LOCK BOX DILUTION DOLLAR COST AVG EXPO NPE ... +

C W ENG 02:38 30-07-2020 99+ 32 x 0284 . M N O Р Q R s T U V w Х Y Z 261 262 263 264 265 266 2 now if rate = 3% net benefit = 24000000/365 x reduction in process time x 3% net benefit = 1972.60 x reduction in process time to make lockbox system indifferent , lockbox cost = net benefit that is, 267 268 269 270 271 4500 = 1972.60 x reduction in process time ANSWER reduction in process time = 2.28 days [4500/1972.60] 3 as the return decreases, the relative cost of lockbox system increases so the processing time will increase 272 273 274 275 276 277 278 279 280 281 282 283 284 - CALCULATOR LOAN OPTIONS pv, fv, annuity CAP STRU VALUE PM, PMT loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPO NPE ... +