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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

LOCKBOX SYSTEM Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grewquickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit, and it keeps its central billing system there. On average, it takes 5 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 3 days— bringing it down to 2 days. HGC receives an average of $1,400,000 in payments per day.

a. How much free cash would HGC generate if it implemented the lockbox system? Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow? How would growth affect your answer?

b. If HGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis?

c. What is the maximum monthly charge HGC should pay for the lockbox system?

a.

Summary Introduction

To determine: The amount of the free cash if the lockbox system is implemented. Whether it will be one time cash flow or recurring one and explain the affect of growth.

Cash budget:

Cash budget refers to a money spending plan, which is an estimation of the money inflows and outpourings for a business over a particular timeframe. This financial plan is utilized to evaluate whether the substance has adequate money to work.

Explanation

Given,

Average payment received per day is $1,100,000.

The estimated time lag is reduce from 3 days to 2 days.

Formula to calculate the amount of the free cash:

Freecash=Timelagreduce×Averagepayment

Substitute $1,100,000 for the average payment and 1 for the lag time reduce

b.

Summary Introduction

To determine: The worth of the lockbox system on the annual basis.

c.

Summary Introduction

To determine: The maximum monthly charge which HGC should pay.

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