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The Management of Cash and Marketable Securities
4. Reduction in Collection Time = Collection Time (Centralized
System) – Collection Time (Decentralized
System)
Average Daily Collections = Annual Collections/365
Amount of Funds Released = Average Daily Collections x Reduction
in Collection Time – Increase in Compensating Balance
Annual (Pre-tax) Earnings
on Released Funds = Amount of Funds Released x Interest Rate
Net (Pre-tax) benefit = Annual (Pre-tax) Earnings on Released Funds +
Reduction in Headquarter’s Collection Costs – Increase
in Local Branch Collection Costs
5. a. Reduction in collection = Collection Time (Centralized System)
time – Collection Time (Lock-box System)
Amount of Funds = Average Daily X Reduction in – Compensating
Released Collections Collection Time Balance (Atl.)
+ Compensating
Balance (Det.)
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The Management of Cash and Marketable Securities
b. Annual (Pre-tax) Earnings = Amount of x Interest
on Released Funds Funds Released Rate
c. Net (Pre-tax) = Annual (Pre-tax) Earnings + Reduction in Processing
benefit on Released Funds Costs
6. a. Annual (Pre-tax) Reduction in Average
Earnings on = Collection x Daily x Interest
Released Funds Time Collections Rate
Additional Wire No. of No. of
Collection = (Transfer – D.T. Check) x Collection x Working
Costs Cost Cost Centers Days/Year
Annual (Pre-tax) Additional
Net (Pre-tax) = Earnings on – Collection
benefit Released Funds Costs
benefit 6 x 250]
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Chapter 17
The Management of Cash and Marketable Securities
benefit 6 x 250]
benefit 6 x 250]
7. a. Under a zero balance system, funds are deposited in the payroll
these funds. The
daily interest rate on these funds is 0.06/365 =
Amount of Amount of Daily Interest Returns = Amount of
Funds Clearing Funds Funds Invested x
Payroll Account Invested Daily Interest Rate
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The Management of Cash and Marketable Securities
Fri. $300,000 $700,000 $700,000 x .00016438 = $115.07
Sat. — 700,000 $700,000 x .00016438 = $115.07
b. In order to make a decision concerning the desirability of
8. a. (i) If check is deposited in NY bank on Monday, check clearing time
is reduced by 2 days.
Net (Pre-tax) Bene4t = Amount of Check x Reduction in Check
Clearing Time (Days) x (Annual Interest
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The Management of Cash and Marketable Securities
(ii) If check is deposited in NY bank on Friday, check clearing
The answers to (i) and (ii) diFer because of the diFerence in the number of
b. (i) Net (Pre-tax) Bene4t = 0 (i.e., Break-even)
(ii) Net (Pre-tax) Bene4t = 0
9. a. Reduction in Collection Time = (4 – 2.5) + (4 – 1.5) = 4 days
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The Management of Cash and Marketable Securities
b. Net Amount of Funds Released = $547,945 x 4 + $400,000
10. a. First Fidelity: Cost = 125,000 x 12 x $0.15 = $225,000
Therefore, accept the First Fidelity proposal.
b. Cost (First Fidelity) = Cost (First Union)
c. Cost (First Fidelity) = Cost (First Union)
11. a. Under a zero balance system, funds are deposited in the dividend
account each day to cover the checks clearing the account that day.
Amount of Funds Amount of Funds Daily Interest
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The Management of Cash and Marketable Securities
Day Clearing Dividend Account Invested Returns
Friday $0 $74,000,000 $15,205
Saturday 0 74,000,000 15,205
Sunday 0 74,000,000 15,205
Total interest returns per dividend period = $98,012
b. The costs of setting up and operating the system need to be
examined.
12. a. Annual (pretax) Earnings on Released Funds = Reduction in collection
time x Average payment per month x Number of
customers x Number of payments per year x Daily interest rate
Additional collection costs = Cost of wire transfer x Number of
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The Management of Cash and Marketable Securities
wire
transfers per year
Net (pretax) benefit = Annual earnings on released funds less
additional collection costs
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