EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 17, Problem 5P
a.
Summary Introduction
To determine: The amount of funds released.
b.
Summary Introduction
To determine: The annual pre-tax earnings on the released funds.
c.
Summary Introduction
To determine: The annual net pre-tax benefits.
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Students have asked these similar questions
Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City.
The firm's average accounts receivable balance is $5.0 million, and they are financed by a bank loan at a
9.50% annual interest rate. The firm is considering setting up a regional lockbox system to speed up
collections, and it believes this would reduce receivables by 20%. If the annual cost of the system is $17,000,
what pre-tax net annual savings would be realized?
a. $78,000
b. $74,600
c. $95,000
d. $112,000
e. $81,400
Smith Inc. currently fills mail orders from all over the country and receipts were received in its head office. The company's average accounts receivable is P3,125,000 and is financed by a bank loan with 10% interest. Smith is considering a regional lockbox system to speed up collections. This system is projected to reduce the average accounts receivable by 15%. The annual cost of the lockbox system is P25,000. What is the estimated net annual savings in implementing the lockbox system?
A. 22,985
B. 28,455
C. 25,750
D. 21,875
Beasley Enterprises has an agreement with Downtown Bank whereby the bank handles $1.02 million in collections a day and requires a $750,000 compensating balance. Beasley is contemplating cancelling the agreement and dividing its eastern region so that two other banks would handle its business. Banks A and B would each handle $.51 million of collections per day and each requires a compensating balance of $400,000. Collections should be accelerated by one day if the eastern region is divided. The T-bill rate is 2.97 percent annually. What is the amount of the annual net savings if this plan is adopted?
Chapter 17 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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- Bulldogs Inc. currently fills mail orders from all over the country and receipts were received in its head office. The company’s average accounts receivable is P3,125,000 and is financed by a bank loan with 10% interest. Bulldogs is considering a regional lockbox system to speed up collections. This system is projected to reduce the average accounts receivable by 15%. The annual cost of the lockbox system is P25,000. What is the estimated net annual savings in implementing the lockbox system? P22,985 P25,750 P28,455 P21,875arrow_forwardBulldogs Inc. currently fills mail orders from all over the country and receipts were received in its head office. The company’s average accounts receivable is P3,125,000 and is financed by a bank loan with 10% interest. Bulldogs is considering a regional lockbox system to speed up collections. This system is projected to reduce the average accounts receivable by 15%. The annual cost of the lockbox system is P25,000. What is the estimated net annual savings in implementing the lockbox system? A. P25,750 B. P21,875 C. P22,985 D. P28,455arrow_forwardJohnson Limited is contemplating the installation of a new system that would allow for automated handling of customer inquiries about their order status, account balances, etc. Currently all such inquiries are handled manually by customer service representatives. The software for the new system would cost $214,000. An additional $169,000 would be required for one-time installation costs. Management estimates that the new system would result in costs of $10,300 per year related to addressing software issues and other technological problems that may arise. However, the new system is expected to reduce labour costs by $65,000 per year. Management estimates that the system would be used for five years. Severance costs related to the employees that would be laid off after implementing the new system would be $22,600. Johnson Limited requires a return of at least 15% on investments of this type. Required: Ignore income taxes. 1. Compute the net annual cost savings promised by the new system.…arrow_forward
- NEKO Inc. deals with various clients throughout the city and is attempting to collect its accounts receivable more efficiently. A major bank has offered a lock-box system for NEKO at a cost of P180,000 per year. NEKO averages 300 receipts daily at an average of P5,000 each. Short-term interest is at 8% annually. What reduction in average collection time would be needed to justify the lock-box system? (Use a 360-day year)arrow_forwardKnob, Inc., is a nationwide distributor of furniture hardware. The company now uses a central billing system for credit sales of $198.00 million annually. First National, Knob’s principal bank, offers to establish a new concentration banking system for a flat fee of $150,000 per year. The bank estimates that mailing and collection time can be reduced by four days. Assume a 360-day year. By how much will Knob’s cash balances be increased under the new system? (Enter your answer in dollars not in millions.) Assume that the borrowing rate is 12%. How much extra interest income will the new system generate if the extra funds are used to reduce borrowing under Knob’s line of credit with First National? (Enter your answer in dollars not in millions.) Calculate the total annual cost of the old system if collection costs under the old system are $45,000 per year? (Enter your answer in dollars not in millions.)arrow_forwardA 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. A. Calculate the cash conversion cycle before the lockbox system B. Calculate the cash conversion cycle after the lockbox system C.arrow_forward
- 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…arrow_forwardGlobal Services is considering a promotional campaign that will increase annual credit sales by $590,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable 5 times Inventory 8 times Plant and equipment 4 times All $590,000 of the sales will be collectible. However, collection costs will be 5 percent of sales, and production and selling costs will be 70 percent of sales. The cost to carry inventory will be 8 percent of inventory. Depreciation expense on plant and equipment will be 20 percent of plant and equipment. The tax rate is 35 percent.a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. b. Compute the accounts receivable collection costs and production and selling costs and then add the two figures together. c. Compute the costs of carrying inventory.…arrow_forwardCow Chips, Incorporated, a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast A Philadelphia-area bank will provide this service for an annual fee of $12,000 pald at the end of the year plus 5 cents per transaction. The estimated reduction in collection and processing time is one day. Treasury bills are currently yielding 5 percent per year, and there are 365 days per year. If the average customer payment in this region is $5,900, how many customers each day, on average, are needed to make the system profitable for Cow Chips? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Number of customers per dayarrow_forward
- A bank is considering two alternatives for handling its service calls in the next decade ( treat this as one period). The projected number of service calls is 10,000,000. If the bank sets up its own service call center in the U.S., the fixed cost is estimated to be $2,700,000, and the variable cost is calculated to be 32 cents per call. If the call service is outsourced to a foreign company, the fixed cost would be $240,000, and the unit charge would be 57 cents per call. (a)What is the break-even number of service calls? (b)Would the bank set up its own service call center or outsource call handlings? (Enter 1 for Produce or enter O for Outsource) (C)What would be the dollar amount that the bank can save by choosing the better option? (Cost difference between the two options)arrow_forwardGlobal Services is considering a promotional campaign that will increase annual credit sales by $650,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment 2 times 4 times 2 times All $650,000 of the sales will be collectible. However, collection costs will be 6 percent of sales, and production and selling costs will be 76 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 10 percent of plant and equipment. The tax rate is 35 percent. a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. Accounts receivable Inventory Plant and equipment Total Investmentarrow_forwardCity Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. 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. If City Farm has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up? How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?arrow_forward
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