Contemporary Financial Management, Loose-leaf Version
Contemporary Financial Management, Loose-leaf Version
14th Edition
ISBN: 9781337090636
Author: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Publisher: South-Western College Pub
Question
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Chapter 17, Problem 3P

a.

Summary Introduction

To determine: The amount of funds released.

a.

Expert Solution
Check Mark

Answer to Problem 3P

The amount of funds released is $2,465,753.42.

Explanation of Solution

Determine the reduction in collection time

ReductioninCollectionTime=ReductioninMailingTime+ReductioninProcessingTime=31.5+62.5=5days

Therefore, the reduction in collection time is 5 days.

Determine the average daily collection

AverageDailyCollection=AnnualCreditSales365=$180,000,000365=$493,150.68

Therefore, the average daily collection is $493,150.68.

Determine the amount of funds released

AmountofFundsReleased=AverageDailyCollection×ReductioninCollectionTime=$493,150.68×5=$2,465,753.42

Therefore, the amount of funds released is $2,465,753.42.

b.

Summary Introduction

To determine: The annual earnings on the released funds.

b.

Expert Solution
Check Mark

Answer to Problem 3P

The annual earnings on the released funds is $2,465,753.42.

Explanation of Solution

Determine the annual earnings on the released funds

AnnualEarnings=AmountofFundsReleased×InterestRate=$2,465,753.42×10%=$246,575.34

Therefore, the annual earnings on the released funds is $246,575.34.

c.

Summary Introduction

To determine: The annual fee.

c.

Expert Solution
Check Mark

Answer to Problem 3P

The annual fee is $315,000.

Explanation of Solution

Determine the annual fee

AnnualFee=FixedCost+VariableCost=$75,000+$0.05×4,800,000=$315,000

Therefore, the annual fee is $315,000.

d.

Summary Introduction

To determine: The annual net benefits.

d.

Expert Solution
Check Mark

Answer to Problem 3P

The annual net benefits are -$18,424.66.

Explanation of Solution

Determine the annual net benefits

AnnualNetBenefits=AnnualEarnings+DecreaseinPaymentAnnualFee=$246,575.34+$50,000$315,000=$18,424.66

Therefore, the annual net benefits are -$18,424.66.

e.

Summary Introduction

To determine: The annual net benefits.

e.

Expert Solution
Check Mark

Answer to Problem 3P

The annual net benefits are $121,917.95.

Explanation of Solution

Determine the amount of funds released

AmountofFundsReleased=AverageDailyCollection×ReductioninCollectionTimeBank Compensating Balance=$493,150.68×4.5$1,500,000=$719,179.50

Therefore, the amount of funds released is $2,465,753.42.

Determine the annual net benefits

AnnualNetBenefits=AmountofFundsReleased×InterestRateReduction in Payment=$719,179.50×10%+$50,000=$121,917.95

Therefore, the annual net benefits are $121,917.95.

f.

Summary Introduction

To discuss: The lockbox system the firm should select.

f.

Expert Solution
Check Mark

Answer to Problem 3P

The lockbox system the firm should select is SLC bank’s lockbox system.

Explanation of Solution

Since SLC’s bank provides a higher net benefits for the firm, the lockbox system that the firm should select is SLC bank’s lockbox system.

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