Simon Corporation has daily cash receipts of $70,000. A recent analysis of its collections indicated that customers' payments were in the mail an average of 3.0 days. Once received, the payments are processed in 2.0 days. After payments are deposited, it takes an average of 3.0 days for these receipts to clear the banking system. a. How much collection float (in days) does the firm currently have? b. If the firm's opportunity cost of capital is 8%, would it be economically advisable for the firm to pay an annual fee of $14,000 to reduce collection float by 2 days? Explain why or why not. c. What would the company's opportunity cost have to be to make the $14,000 fee worthwhile?
Simon Corporation has daily cash receipts of $70,000. A recent analysis of its collections indicated that customers' payments were in the mail an average of 3.0 days. Once received, the payments are processed in 2.0 days. After payments are deposited, it takes an average of 3.0 days for these receipts to clear the banking system. a. How much collection float (in days) does the firm currently have? b. If the firm's opportunity cost of capital is 8%, would it be economically advisable for the firm to pay an annual fee of $14,000 to reduce collection float by 2 days? Explain why or why not. c. What would the company's opportunity cost have to be to make the $14,000 fee worthwhile?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter8: Budgeting For Planning And Control
Section: Chapter Questions
Problem 23E: Historically, Ragman Company has had no significant bad debt experience with its customers. Cash...
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Simon Corporation has daily cash receipts of $70,000. A recent analysis of its collections indicated that customers' payments were in the mail an average of
3.0 days. Once received, the payments are processed in 2.0 days. After payments are deposited, it takes an average of 3.0 days for these receipts to clear the banking system.
a. How much collection float (in days) does the firm currently have?
b. If the firm's opportunity cost of capital is 8%, would it be economically advisable for the firm to pay an annual fee of $14,000 to reduce collection float by 2 days? Explain why or why not.
c. What would the company's opportunity cost have to be to make the $14,000 fee worthwhile?
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