Provide correct answer general accounting A firm has arranged for a lock-box system to reduce collectiontime of accounts receivable. Currently the firm has an averagecollection period of 43 days, an average age of inventory of 50days, and an average payment period of 10 days. The lock-boxsystem will reduce the average collection period by 3 days byreducing processing, mail, and clearing float. The firm has totalannual outlays of $15,000,000 and currently pays 9% for itsfinancing. (Assume a 360-day year.)(a) Calculate the cash conversion cycle before and after thelock-box system.(b) Calculate the savings in financing costs from the lock-boxsystem.

Step 1: Define Cash Conversion CycleAbbreviated as CCC, Cash conversion cycle is the calculation of…

Answered: A firm has arranged for a lock-box…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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Murkywater Company is considering a lockbox system. Its collection delay is currently 12 days. Reduction in mailing time = 1.5 day Reduction in clearing time = 1.5 day Reduction in firm processing time = 1.0 day Total = 4.0 days The following is also known: Daily interest on Treasury bills = 0.025% Average number of daily payments to lockboxes = 4,000 Average size of payment = $400 A local bank has agreed to operate this lockbox system for a fee of $0.25 per check processed. What are the costs associated with the proposal?
Murkywater Company is considering a lockbox system. Its collection delay is currently 12 days. Reduction in mailing time = 1.5 day Reduction in clearing time = 1.5 day Reduction in firm processing time = 1.0 day Total = 4.0 days The following is also known: Daily interest on Treasury bills = 0.025% Average number of daily payments to lockboxes = 4,000 Average size of payment = $400 A local bank has agreed to operate this lockbox system for a fee of $0.25 per check processed. What are Murkywater’s average daily collections? Multiple Choice $1,600,000 $1,200,000 $1,000,000 $1,800,000 $1,400,000
Murkywater Company is considering a lockbox system. Its collection delay is currently 12 days. Reduction in mailing time = 1.5 day Reduction in clearing time = 1.5 day Reduction in firm processing time = 1.0 day Total = 4.0 days The following is also known: Daily interest on Treasury bills = 0.025% Average number of daily payments to lockboxes = 4,000 Average size of payment = $400 A local bank has agreed to operate this lockbox system for a fee of $0.25 per check processed. What are the costs associated with the proposal? Multiple Choice $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000
Murkywater Company is considering a lockbox system. Its collection delay is currently 12 days. • Reduction in malling time = 1.5 day . Reduction in clearing time = 1.5 day • Reduction in firm processing time=1.0 day • Total = 4.0 days The following is also known: • Dally Interest on Treasury bills = 0.025% • Average number of daily payments to lockboxes - 4,000 Average size of payment = $400 A local bank has agreed to operate this lockbox system for a fee of $0.25 per check processed. What are Murkywater's average daily collections? Multiple Choice $1,000,000 O $1.200,000 O $1,400,000 O $1,600,000 $1,800,000
Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lockbox system. She forecasts that 220 payments a day will be made to lockboxes with an average payment size of $3,300. The bank’s charge for operating the lockboxes is $0.58 a check. Assume an interest rate of 8% and a 365-day year. What reduction in the time to collect and process each check is needed to justify use of the lockbox system? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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Beasley Enterprises has an agreement with Downtown Bank whereby the bank handles $1.02 million in collections a day and requires a $750,000 compensating balance. Beasley is contemplating cancelling the agreement and dividing its eastern region so that two other banks would handle its business. Banks A and B would each handle $.51 million of collections per day and each requires a compensating balance of $400,000. Collections should be accelerated by one day if the eastern region is divided. The T-bill rate is 2.97 percent annually. What is the amount of the annual net savings if this plan is adopted?
Community Financial provides lockbox services. They estimate that your firm can reduce its average collection mail time by 1.6 days and the clearing and processing time by 1.2 days by implementing their system. Your firm receives 74 checks a day with an average value of $9,750 each. The current T-Bill rate is .014 percent per day. Assume a 365-day year. What is the net amount of annual income your firm can earn if it installs this service at an annual cost of $48,000? Multiple Choice $62,640.00 $58,746.20 $56,408.17 $65,675.00 $55,232.22 G
Knob, Inc., is a nationwide distributor of furniture hardware. The company now uses a central billing system for credit sales of $198.00 million annually. First National, Knob’s principal bank, offers to establish a new concentration banking system for a flat fee of $150,000 per year. The bank estimates that mailing and collection time can be reduced by four days. Assume a 360-day year. By how much will Knob’s cash balances be increased under the new system? (Enter your answer in dollars not in millions.) Assume that the borrowing rate is 12%. How much extra interest income will the new system generate if the extra funds are used to reduce borrowing under Knob’s line of credit with First National? (Enter your answer in dollars not in millions.) Calculate the total annual cost of the old system if collection costs under the old system are $45,000 per year? (Enter your answer in dollars not in millions.)
a. Paradise Retailers, Inc. (PRI) determined that $1,500,000 is needed for cash transactions made during the next year. Each time PRI deposits money in its checking account, a charge of $12.95 is assessed to cover clerical costs. PRI can hold marketable securities that yield 4.5%, and then convert these securities to cash at a cost of only the $12.95 deposit charge. Optimal Cash Amount = 29382.53 PRI’s financial managers have not been following the Baumol Model. Instead, they have been transferring cash from marketable securities less frequently, namely, transferring cash every three weeks. What total cash cost including holding costs and transactions costs could PRI save by transferring the optimal cash amount C* rather than this larger transfer amount?
City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers, so the firm's checks will take longer to clear the bank. Collection time has been reduced by two and one-half days and disbursement time increased by one and one-half days because of these policies. Excess funds are being invested in short-term instruments yielding 5 percent per annum. If City Farm has $4.90 million per day in collections and $3.90 million per day in disbursements, how many dollars has the cash management system freed up? Note: Enter your answer in dollars not in millions (e.g., $1,234,567). How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? Note: Enter your answer in dollars not in millions (e.g., $1,234,567).
The George Company has a policy of maintaining an end-of-month cash balance of at least $30,000.In months where a shortfall is expected, the company can draw in $1,000 increments on a line ofcredit it has with a local bank, at an interest rate of 12% per annum. All borrowings are assumed forbudgeting purposes to occur at the beginning of the month, while all loan repayments (in $1,000increments of principal) are assumed to occur at the end of the month. Interest is paid at the end ofeach month. For April, an end-of-month cash balance (prior to any financing and interest expense)of $18,000 is budgeted; for May, an excess of cash collected over cash payments (prior to any interest payments and loan repayments) of $22,000 is anticipated. What is the interest payment estimatedfor April (there is no bank loan outstanding at the end of March)? What is the total financing effect(cash interest plus loan transaction) for May?

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