EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
17th Edition
ISBN: 9781260464900
Author: BLOCK
Publisher: MCGRAW-HILL LEARNING SOLN.(CC)
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Chapter 7, Problem 1P
City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm’s checks will take longer to clear the bank. Collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.
a. If City Farm has
b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?
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Sheila's Society Clothing Manufacturer has collection centres around the country to speed up cash collections. The company also
makes its disbursements from remote disbursement centres, so cheques written by Sheila's take longer to clear the bank. Collection
time has been reduced by three days and disbursement time has been increased by two days because of these policies. Excess funds
are being invested in short-term instruments yielding 5 percent per annum.
a. If the firm has $4.20 million per day in collections and $3.20 million per day in disbursements, how many dollars has the cash
management system freed up? (Enter the answer in dollars not in millions.)
Freed-up funds
b. How much can Sheila's earn per year on short-term investments made possible by the freed-up cash? (Enter the answer in dollars
not in millions.)
Interest on freed-up cash
$
Bird's Eye Treehouses, Incorporated, a Kentucky company, has determined that a
majority of its customers are located in the Pennsylvania area. It therefore is considering
using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated
that use of the system will reduce collection time by 1.5 days. Assume 365 days a year.
Average number of payments per day
Average value of payment
Variable lockbox fee (per transaction)
Annual interest rate on money market securities
880
$830
$.10
3.2%
a. What is the NPV of the new lockbox system? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. Suppose in addition to the variable charge that there is an annual fixed charge of
$3,000 to be paid at the end of each year. What is the NPV now? (A negative answer
should be indicated by a minus sign. Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.)
Answer is complete but not entirely…
Bird's Eye Treehouses, Incorporated, a Kentucky company, has determined that a
majority of its customers are located in the Pennsylvania area. It therefore is considering
using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated
that use of the system will reduce collection time by 1.5 days. Assume 365 days a year.
Average number of payments per day
Average value of payment
Variable lockbox fee (per transaction)
Annual interest rate on money market securities
850
$ 800
$.10
a. NPV
b. NPV
3.2%
a. What is the NPV of the new lockbox system? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. Suppose in addition to the variable charge that there is an annual fixed charge of
$3,000 to be paid at the end of each year. What is the NPV now? (A negative answer
should be indicated by a minus sign. Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.)
Chapter 7 Solutions
EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
Ch. 7 - Prob. 1DQCh. 7 - Prob. 2DQCh. 7 - Why would a financial manager want to slow down...Ch. 7 - Use The Wall Street Journal or some other...Ch. 7 - Why are Treasury bills a favorite place for...Ch. 7 - Explain why the bad debt percentage or any other...Ch. 7 - What are three quantitative measures that can be...Ch. 7 - Prob. 8DQCh. 7 - What does the EOQ formula tell us? What assumption...Ch. 7 - Why might a firm keep a safety stock? What effect...
Ch. 7 - If a firm uses a just-in-time inventory system,...Ch. 7 - City Farm Insurance has collection centers across...Ch. 7 - Prob. 2PCh. 7 - Orbital Communications has operating plants in...Ch. 7 - Postal Express has outlets throughout the world....Ch. 7 - Thompson Wood Products has credit sales of...Ch. 7 - Oral Roberts Dental Supplies has annual sales of...Ch. 7 - Knight Roundtable Co. has annual credit sales of...Ch. 7 - Darla’s Cosmetics has annual credit sales of...Ch. 7 - Barney’s Antique Shop has annual credit sales of...Ch. 7 - Mervyn’s Fine Fashions has an average collection...Ch. 7 - Route Canal Shipping Company has the following...Ch. 7 - Nowlin Pipe & Steel has projected sales of 72,000...Ch. 7 - Fisk Corporation is trying to improve its...Ch. 7 - Prob. 14PCh. 7 - Diagnostic Supplies has expected sales of 84,100...Ch. 7 - Wisconsin Snowmobile Corp. is considering a switch...Ch. 7 - Johnson Electronics is considering extending trade...Ch. 7 - Henderson Office Supply is considering a more...Ch. 7 - Fast Turnstiles Co. is evaluating the extension of...Ch. 7 - Slow Roll Drum Co. is evaluating the extension of...Ch. 7 - Global Services is considering a promotional...Ch. 7 - Problems 22-25 are a series and should be...Ch. 7 - Problems 22-25 are a series and should be...Ch. 7 - Problems 22-25 are a series and should be...Ch. 7 - Problems 22-25 are a series and should be...
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- The XYZ customer service branch maintains a disbursement account which is funded by the main office. The branch needs funds for daily disbursements of P40,000 and a minimum balance of P20,000. The cost to transfer funds from the main office to the branch averages P300. The return on money marketable securities is 5%. If the entity uses a 250-day year for financial analysis, how much is the optimal cash amount to be requested by the branch each time?arrow_forwardIt takes Cookie Cutter Modular Homes, Incorporated, about six days to receive and deposit checks from customers. The company’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $136,000 and the required rate of return is an EAR of 6 percent. Assume 365 days per year. a. What is the reduction in the outstanding cash balance as a result of implementing the lockbox system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the daily dollar return that could be earned on these savings? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c-1. What is the maximum monthly charge the company should pay for this lockbox system if the payment is due at the end of the month? (Do not round intermediate calculations and…arrow_forwardAnne Teak, the financial manager of a furniture manufacturer, is considering operating a lockbox system. She forecasts that 220 payments a day will be made to lockboxes with an average payment size of $3,300. The bank’s charge for operating the lockboxes is $0.58 a check. Assume an interest rate of 8% and a 365-day year. What reduction in the time to collect and process each check is needed to justify use of the lockbox system? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forward
- ABC Corporation receives checks from its customers. The total check value averages 700,000 each day. It takes an average of 5 days from deposits for these to clear the bank. If the bank offers to accelerate the 5-day clearing process to 3 days for a monthly fee of 600. If ABC can earn 4% investment income from excess cash, how much is the net annual benefits/cost of this bank offer?arrow_forwardBird's Eye Treehouses, Incorporated, a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. Therefore, it is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 1.5 days. Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Effective annual rate on money market securities 825 $745 $.15 a. NPV b. NPV 5.5% The total collection time will be reduced by three days if the lockbox system is adopted. a. What is the NPV of the new lockbox system? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose in addition to the variable charge, there is an annual fixed charge of $5,000 to be paid at the end of each year. What is the NPV now? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer…arrow_forwardYY Corporation has daily collections of 130,000 from a selected foreign customer group. The bank offered to accelerate the clearing time of these collections from 8 days to 3 days for a quarterly fee of 1,000. YY can invested freed cash into a mutual fund to earns 5% annually. How much is the net benefit/(cost) of this bank service?arrow_forward
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