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Homework answers / question archive / Sheila's Society Clothing Manufacturer has collection centres around the country to speed up cash collections
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 a half days and disbursement time has been increased by two days because of these policies. Excess funds are being invested in short-term instruments yielding 4 percent per annum. a. If the firm has $4.80 million per day in collections and $3.80 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
a. Computation of Total Freed-up Amount:
Given,
Amount of daily collection = $4,800,000
Reduction in collection period = 3.5 days
Amount of daily disbursement = $3,800,000
Increase in disbursement period = 2 days
Cash freed up from Collection = Amount of daily collection * Reduction in collection period
= $4,800,000 * 3.5 days
= $16,800,000
Cash freed up from Disbursement = Amount of daily disbursement * Increase in disbursement period
= $3,800,000 * 2 days
= $7,600,000
Total freed up Fund = Cash freed up from Collection + Cash freed up from Disbursement
= 16,800,000 + 7,600,000
Total freed up Fund = $24,400,000
b. Computation of Interest on Freed-up Cash:
Interest on freed up cash = Interest rate * Amount freed up
= 4% * $24,400,000
Interest on freed up cash = $976,000
