Question

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two 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 Florida.

a. If Neon Light Company has $2.35 million per day in collections and $1.07 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

Answer 1

For calculating free up cash we need to calculate the amount of cash that the company have after making and collecting payments.

Here it says that the payments will be collected at a speed up days by 2. i.e collection can be done at the rate twice per day. Whereas the payments for disbursements are concerned they can be slow down by 0.5 day.
This will ultimately generates more cash inflow -

Calculation of free cash is below -

Cash available plus cash saved for disbursements in a day will be the total amount of cash freed up.