7-3 City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so checks written by City Farm take longer to clear the bank Collection time has been reduced by two and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yield ing 12 percent per annum a. 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 b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? Solution: City Farm Insurance a. $5000,000 daily collections x 2.0 days speed up $10,000,000 additional collections S3,000,000 daily disbursements x 1.0 days slow down= $3.000.000 delayed disbursements $13,000,000 freed-up funds b $13,000,000 freed-up funds 12% interest rate S 1, 560,000 interest on freed-up cash CopyrightC 2005 by The McGray-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-246 7-3. City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so checks written by City Farm take longer to clear the bank. Collection time has been reduced by two 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 $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up? b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? Solution: City Farm Insurance a. $5,000,000 daily collections x 2.0 days speed up = $10,000,000 additional collections $3,000,000 daily disbursements x 1.0 days slow down = $ 3,000,000 delayed disbursements $13,000,000 freed-up funds b. $13,000,000 freed-up funds x 12% interest rate $ 1,560,000 interest on freed-up cash
Nicholas Birdcage Company of Hollywood ships cages throughout the country Nicholas has determined that through the establishment of local collection centers around the country, he can speed up the collection of payments by one d one-half days. Furthermore, the cash management department of his bank has indicated to him that he can defer his payments on his accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida a. If the company has $4 million per day in collections and $2 million per day in disbursements, how many dollars will the cash management system free b. If the company can earn 9 percent per annum on freed up funds, how much zill th e income c. If the total cost of the new system is $700,000, should it be implemented? Solution: Nicholas birdcage company of hollywood a.$4,000,000 daily collections x 1.5 days speed up=$6,000,000 additional collections $2,000,000 daily disbursements x 5 days slow down=$1,000000 delayed disbursements $7,000,000 freed-up funds b $7,000,000 freed-up funds interest rate $630.000 interest on freed-up cash c. No. The income of $630.000 is $70.000 less than the cost of $700,000 for the new system S-247 Copyright C2005 by The McGra-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-247 7-4. Nicholas Birdcage Company of Hollywood ships cages throughout the country. Nicholas has determined that through the establishment of local collection centers around the country, he can speed up the collection of payments by one and one-half days. Furthermore, the cash management department of his bank has indicated to him that he can defer his payments on his accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida. a. If the company has $4 million per day in collections and $2 million per day in disbursements, how many dollars will the cash management system free up? b. If the company can earn 9 percent per annum on freed up funds, how much will the income be? c. If the total cost of the new system is $700,000, should it be implemented? Solution: Nicholas Birdcage Company of Hollywood a. $4,000,000 daily collections x 1.5 days speed up = $6,000,000 additional collections $2,000,000 daily disbursements x .5 days slow down = $1,000,000 delayed disbursements $7,000,000 freed-up funds b. $7,000,000 freed-up funds x 9% interest rate $ 630,000 interest on freed-up cash c. No. The income of $630,000 is $70,000 less than the cost of $700,000 for the new system
7-5 Megahurtz International Car Rentals has rent-a-car outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries Assume in 2003. it held 10.000 reals in Brazil worth 35.000 dollars. It drew 12 percent interest, but the Brazilian real declined 20 percent against the dollar. a. What is the value of its holdings, based on U.S. dollars, at year-end? (Hint multiply $35,000 times 1 12 and then multiply the resulting value by 80 drew 9 percent interest and the real went up by 10 percent agan the pi b. What is the value of its holdings, based on U.S. dollars, at year-end if it dollar? Solution Megahurtz international car rental a.$35,000x1.12=$39,200 S39.200 x 80%=$.360 dollar value of real holdings b.$35,000x109=$38,150 S38.150x 110%=$41.965 dollar value of real holdings 7-6 Thompson Wood Products has cred it sales of $2, 160,000 and accounts receivable of $288,000. Compute the value of the average collection period Solution: Thompson wood Products Accounts receivable Average collection period average daily credit sales $288.00 $2160,000/360 $288,000 $6.000 CopyrightC 2005 by The McGray-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-248 7-5. Megahurtz International Car Rentals has rent-a-car outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2003, it held 10,000 reals in Brazil worth 35,000 dollars. It drew 12 percent interest, but the Brazilian real declined 20 percent against the dollar. a. What is the value of its holdings, based on U.S. dollars, at year-end? (Hint: multiply $35,000 times 1.12 and then multiply the resulting value by 80 percent or 1 – .20). b. What is the value of its holdings, based on U.S. dollars, at year-end if it drew 9 percent interest and the real went up by 10 percent against the dollar? Solution: Megahurtz International Car Rental a. $35,000 x 1.12 = $39,200 $39,200 x 80% = $31,360 dollar value of real holdings b. $35,000 x 1.09 = $38,150 $38,150 x 110%= $41,965 dollar value of real holdings 7-6. Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000. Compute the value of the average collection period. Solution: Thompson Wood Products 48 days $6,000 $288,000 $2,160,000/ 360 $288,000 Average daily credit sales Accounts Receivable Average collection period = = = =
7-7 Darla's Cosmetic has annual cred it sales of $1, 440, 000 and an average collection period of 45 days in 2004. Assume a 360-day year. What is the company's average accounts receivable balance? Accounts receivable are equal to the average daily cred it sales times the average collection period Solution: Thompson wood Products $1,440,000 annual credit sales/360=$4, 000 per day credit sales 84,000 credit sales x 45 average collection period=$180,000 average accounts receivable balance 7-8 In Problem 7, if accounts receivable change to $200,000 in the year 2005, whi cred it sales are $1.800.000. should we assume the firm has a more or a lesse lenient cred it policy? Soluti Darlas Cosmetics(Continued To determine if there is a more lenient credit policy, compute the average collection period Average collection period= Accounts Receivable Average daily credit sales $20000 $l800000/360 $200000 40 days $5,000 Since the firm has a shorter average collection period, it appears that the firm does not have a more lenient credit policy S-249 CopyrightC2005 by The McGraw-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-249 7-7. Darla’s Cosmetic has annual credit sales of $1,440,000 and an average collection period of 45 days in 2004. Assume a 360-day year. What is the company's average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period. Solution: Thompson Wood Products $1,440,000 annual credit sales/360 = $4,000 per day credit sales $4,000 credit sales x 45 average collection period = $180,000 average accounts receivable balance 7-8. In Problem 7, if accounts receivable change to $200,000 in the year 2005, while credit sales are $1,800,000, should we assume the firm has a more or a less lenient credit policy? Solution: Darla’s Cosmetics (Continued) To determine if there is a more lenient credit policy, compute the average collection period. 40 days $5,000 $200,000 $1,800,000/ 360 $200,000 Average daily credit sales Accounts Receivable Average collection period = = = = Since the firm has a shorter average collection period, it appears that the firm does not have a more lenient credit policy
Hubbell Electronic Wiring Company has an average collection period of 35 days. The accounts receivable balance is $105,000. What is the value of cred it Solution Hubbell Electronic wiring Company Accounts receivable Average collection period Average daily credit sales $105 35 days credit sales 360 Credit sales/360 $105.000 Credit sales/360=$3,000 credit sales per da Credit sales=$3,000×360=$1,080,000 CopyrightC 2005 by The McGray-Hill Companies, Inc. -250
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-250 7-9. Hubbell Electronic Wiring Company has an average collection period of 35 days. The accounts receivable balance is $105,000. What is the value of credit sales? Solution: Hubbell Electronic Wiring Company Credit sales $3,000 360 $1,080,000 Credit sales/360 $3,000 credit sales per day 35 days $105,000 Credit sales/360 360 credit sales $105,000 35 days Average daily credit sales Accounts receivable Average collection period = = = = = =