Norma’s Cat Food of Shell Knob

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.

If Norma’s Cat Food of Shell Knob speeds up collection payments by two and one-half days and defer its payments on accounts by one-half day, this will essentially free up 3 days of cash at its disposal.

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. Norma’s.

$5 million per day in collections is multiplied by the two and a half days in sped up collections, this brings a total of 12,500,000 million dollars, and moreover, the daily disbursements of 3,000,000 cut into half of a day, this equates to (1,500,000) in delayed disbursements. The deferments to the firms account now freed up $14,000,000.

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

The sped up collection of payments by the collection centers two and a half days and half a day deferred payment without affecting suppliers, the firm earns 8% in income, which equates to $1,120,000.

c. If the annual cost of the new system is $800,000, should it be implemented? Explain why or why not.

This would be a good investment to implement. This system would allow earnings of $320,000 after this system is set into play. This works because speeding up collections by two and a half days and deferring payments for a half of day would not only be enough to afford this new system but, leave extra income for other investment opportunities for better cooperate functioning.