Cash Management

Argosy University

FIN 401 A01

15 September 2014

Cash Management

Norma’s Cat Food of Shell Knob ships cat food throughout the country. Norma has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two and one-half days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Iowa.

a. If the company has $5 million per day in collections and $3 million per day in disbursements, how many dollars will the cash management system free up?  Justify your answers.

$5,000,000 per day in collections x 2.5 days collection sped up =

$12,500,000 additional collections

$3,000,000 per day in disbursements x 0.5 days deferred payments to accounts =

$1,500,000 delayed discernments

$12,500,000 additional collections + $1,500,000 delayed discernments =

$14,000,000 million freed up

b. If the company can earn 8 percent per annum on freed-up funds, how much will the income be? Justify your answers.

8% (.08) x $14,000,000 = $1,120,000 income

c. If the annual cost of the new system is $800,000, should it be implemented? Explain why or why

$1,120,000 income - $800,000 new system cost = $320,000 annually if service is adapted

Yes, this should be implemented. There would be a $320,000 annual profit if the service is implemented.

Reference:

Block, S. B., Hirt, G. A., & Danielsen, B. R. (2008). Foundations of Financial Management, 13th Edition. New York: McGraw-Hill Irwin.