83.
Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower
cash balance limit of $25,000. The standard deviation of the disbursements
is $13,000. The applicable weekly interest rate is 0.045 percent and the
fixed cost of transferring funds is $52. What is your optimal average cash
balance based on the Miller-Orr model?
84.
The Burger Stop spends $52,000 a week to pay bills and maintains a lower
cash balance limit of $60,000. The standard deviation of the disbursements
is $7,500. The applicable weekly interest rate is 0.04 percent and the fixed
cost of transferring funds is $50. What is your optimal average cash balance
based on the Miller-Orr model?
85.
Your firm spends $48,000 a week to pay bills and maintains a lower cash
balance limit of $50,000. The standard deviation of the disbursements is
$8,100. The applicable weekly interest rate is 0.054 percent and the fixed
cost of transferring funds is $65. What is your cash balance target based on
the Miller-Orr model?
86.
Travel Inn Express spends $109,000 a week to pay bills and maintains a
lower cash balance limit of $125,000. The standard deviation of the
disbursements is $14,400. The applicable weekly interest rate is 0.039
percent and the fixed cost of transferring funds is $58. What is the inn’s
cash balance target based on the Miller-Orr model?
87.
Each business day, on average, a company writes checks totaling $26,000
to pay its suppliers. The usual clearing time for the checks is 5 days.
Meanwhile, the company is receiving payments from its customers each
day, in the form of checks, totaling $40,000. The cash from the payments is
available to the firm after 2 days. What is the amount of the firm’s average
net float?
88.
Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The
delay in clearing is typically 4 days. The current interest rate is 0.025
percent per day. Assume 30 days per month. What is the highest daily fee
the company should be willing to pay to eliminate its float entirely?
89.
Your neighbor goes to the post office once a month and picks up two
checks, one for $18,000 and one for $4,000. The larger check takes 4 days
to clear after it is deposited; the smaller one takes 6 days. Assume 30 days
per month. What is the weighted average delay?
90.
Your firm has an average receipt size of $60. A bank has approached you
concerning a lockbox service that will decrease your total collection time by
1 day. You typically receive 25,000 checks per day. The daily interest rate is
0.016 percent. What is the NPV of the lockbox project if the bank charges a
fee of $210 per day?
91.
A mail-order firm processes 5,000 checks per month. Of these, 55 percent
are for $55 and 45 percent are for $65. The $55 checks are delayed 2 days
on average; the $65 checks are delayed 5 days on average. Assume each
month has 30 days. The interest rate is 6 percent per year. How much
should the firm be willing to pay to reduce the weighted average float by 1.4
days?
92.
Paper Submarine Manufacturing is investigating a lockbox system to reduce
its collection time. It has determined the following:
The total collection time will be reduced by 2 days if the lockbox system is
adopted. What is the NPV of adopting the lockbox system?
93.
Home Roasted Turkeys disburses checks every 4 weeks that average
$70,000 and take 5 days to clear. How much interest can the company earn
if it delays transfer of funds from an interest-bearing account that pays 0.02
percent per day for these 5 days? Ignore the effects of compound interest.
Assume 52 weeks in a year.
94.
Never Again Enterprises has an agreement with The Worth Bank whereby
the bank handles $3.12 million in collections a day and requires a
$1,000,000 compensating balance. Never Again is contemplating canceling
the agreement and dividing its eastern region so that two other banks will
handle its business. Banks A and B will each handle $1.56 million of
collections a day, and each requires a compensating balance of $1,550,000.
Never Again’s financial management expects that collections will be
accelerated by one day if the eastern region is divided. The T-bill rate is 4
percent annually. What is the amount of the annual net savings if this plan
is adopted?
95.
Mountaintop Inns, 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,
Pennsylvania. The bank has estimated that use of the system will reduce
collection time by one day. In addition to the variable charge shown below,
there is also a fixed charge of $4,320 per year for the lockbox system.
Assume a year has 365 days. What is the NPV of the lockbox system given
the following information?
96.
Cow Chips, Inc., 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 $25,000 plus 12 cents per transaction. The estimated
reduction in collection and processing time is one day. The average
customer payment in this region is $8,200. Treasury bills are currently
yielding 5 percent per year. Assume a year has 365 days. Approximately how
many customers each day, on average, are needed to make the system
profitable for Cow Chips, Inc.?
Essay Questions
97.
Explain how a lockbox system operates and why a firm might consider
implementing such a system.
98.
Explain how the Check Clearing Act for the 21st Century affects both
collection and disbursement float.
99.
Explain how the unethical use of uncollected funds has been impacted by
the growth of on-line retailing and banking.
100.
Float management systems may provide only minimal benefits to a firm.
Given that most firms have other projects with higher positive net present
values, why should a firm’s managers spend time implementing a float
management system?
101.
Explain what a zero–balance account is, how it is used, and how it affects
cash management.