Cash Management

Cash Management

Roslyn M McIntyre

Argosy University

June 22, 2016

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.

The cash management system will free up $12.5 million in collections and $1.5 million in disbursements. A total of $14 million will be freed up.

Calculation:

$5 million daily collections

x 2.5 days speed up = $12.5 million additional collections

$3 million daily disbursements

x 0.5 days slow down = $1.5 million delayed disbursements

$14 million freed up funds

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

The income will be $1,120,000 if 8% per annum is earned on the $14 million freed up funds.

Calculation:

$14,000,000 freed up funds

x 8% interest rate

$1,120,000 Interest on freed up cash

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

I believe that the new system should be implemented if the annual cost is $800,000, because there would still be $320,000 income left over from the $1,120,000.

Reference

Block, Stanley, Hirt, G., Danielsen, B. (09/2014). Foundations of Financial Management, 15th

Edition. (page 198). [VitalSource Bookshelf Online]. Retrieved from https://digitalbookshelf.argosy.edu/#/books/1259561437/