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 one 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 Florida.  

a. If Neon Light Company has $3.20 million per day in collections and $1.24 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).)
  

     

b. If Neon Light Company can earn 10 percent per annum on freed-up funds, how much will the income be? (Enter your answer in dollars not in millions (e.g., $1,234,567).)
  

   

c. If the total cost of the new system is $495,000, should it be implemented?
  

	No
	Yes

Answer 1

Requirement (a) – Freed-up Fund

Freed-up Funds = [Daily collections x Day speed-up] + [Daily disbursements x Day slow down]

= [$32,00,000 x 1.50 Days] + [$12,40,000 x 0.50 Days]

= $4,800,000 + $620,000

= $5,420,000

Requirement (b) – Interest on Freed-up Fund

Interest on Freed-up Fund = Freed-up Fund x Interest rate per annum on freed-up funds

= $5,420,000 x 10%

= $542,000

Requirement (c) – Decision

“YES”. It should be implemented, since the Net Income of $542,000 is more than the total cost of the new system of $495,000.