Norma's Cat Food of Shell Knob ships cat food all around the United States. Norma has established that by establishing local collection centers across the country, she can reduce payment collecting time by two and a half days. Furthermore, her bank's cash management department has informed her that she can postpone payments on her accounts by one-half day without harming suppliers. In Iowa, the bank has a remote disbursement center. How much money will the cash management system save up if the company has $5 million in collects and $3 million in disbursements per day? Justify your responses. The amount that can be freed up will amount to $ 6,000,000 and this is calculated as follows:
In this, the business should try to speed up the process of collections by about 2 ½ days and on the other hand defer the payments by 1/2 a day. This will add up to 3 days worth of more money in the given period.
Note: figures given are in million dollars
To calculate; $5 - $3 = $ 2. If you multiply this by 3 days you get $6 which is the money that the cash management system ought to free up.
If the company can earn 8 percent per annum on freed-up funds, how much will the income be? Justify your answers.
In this, what need to be calculated is 8% of the $ 6 million. 8/100 (6,000,000) = $ 480, 000 and this will be the income.
If the annual cost of the new system is $800,000, should it be implemented? Explain why or why not.
As a result of the above calculations, it is not appropriate to initiate the new system. The reason to this is that the income gotten from it will only be $480,000 and the expense to be incurred is $ 800,000 dollars. This thus depicts that the investment is a poor choice since the business would not be incurring any profit in the venture but it would be incurring losses.
References
Hillier, D. (2013). Corporate finance. London u.a: McGraw-Hill.
Lewis, P. (2007). Management : challenges for tomorrow's leaders. Mason, OH: Thomson/South-Western.
