A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by three days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its negotiated financing. 1. Calculate the cash conversion cycle before the lockbox system? 2. Calculate the cash conversion cycle after the lockbox system? 3. Calculate the savings in financing costs from the lockbox system?
A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by three days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its negotiated financing. 1. Calculate the cash conversion cycle before the lockbox system? 2. Calculate the cash conversion cycle after the lockbox system? 3. Calculate the savings in financing costs from the lockbox system?
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 33P
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A firm has arranged for a lockbox system to reduce collection time of accounts receivable . Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by three days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its negotiated financing.
1. Calculate the cash conversion cycle before the lockbox system?
2. Calculate the cash conversion cycle after the lockbox system?
3. Calculate the savings in financing costs from the lockbox system?
Q2. The following data applies to a company.
1. The minimum cash balance is $8,000.
2. The variance of daily cash flows is 4,000,000, equivalent to a standard deviation of $2,000 per day.
3. The transaction cost for buying or selling securities is $50. The interest rate is 0.025 per cent per day.
You are required to formulate a decision rule using the Miller-Orr model.
1. What is the optimal cash return point?
2. What is the upper cash limit?
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