The Weighted Average Cost of Capital

Cash Management

Liny Chim

FIN 401, M2 Assignment 2

Instructor Rajasakeran Ignatius

July 28, 2013

Given the scenario, “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.” (Argosy University, 2013)

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.

Answer: $5 million x 2.5 days + $3 million x 1 day = $ 12.5 million + $3 million= $15.5 million

The available funds are $15.5 million.

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

If the company can earn 8 percent per annum on freed up funds the income would be $15.5 million. How this number can be found is simply just by taking $15.5 million dollars (which are the available funds as identified in the previous question) and multiplying it by 8 percent (.08) and you get.

15,500,000 x .08= 1,200,000

Freed-up funds x interest rate = $15.5 million x 8% = $1,200,000

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

The cost of $800,000 is less than the benefit of $1,200,000. It should be implemented.

References

Argosy University Online. (2013). Financial Management: Module 2: Cash Management examples. Retrieved from http://www.myeclassonline.com

Block, S.B. (2009). Foundation of Financial Management. 13ed. [E-Reader version]....