Chapter 19, Problem 1M

Summary Introduction

Case synopsis:

Person B found corporation W 20 years before. It was started as a mail order company and grew rapidly in recent years. As there is an extensive geographical dispersion of customers of the company, it presently employs a lockbox system with the collection place in City S.

Person H, the treasurer of the company, is assessing the present cash collection policies. He identifies the number of payments to be handled by the lockbox service and the company’s present policy is to invest the payments in the short-term marketable securities. Due to this, the proceeds are wire-transferred to the headquarters of the corporation in order to meet payroll.

Person H was approached by the third national bank on the possibility of establishing a banking system for Corporation W.

Characters in the case:

• Corporation W
• Person H
• Person B

Adequate information:

• The third national bank would accept every lockbox center’s regular payment through ACH (Automated Clearinghouse).
• The transferred funds through ACH would not be available for utilization for a single day.

To calculate: The overall net cash flow from the present lockbox system in order to meet the payroll.

Answer:

The amount available or the net cash flow is $10,794,781.97.