I have an answer, just checking to make sure it\'s correct. Nicholas Birdcage Co

Question

I have an answer, just checking to make sure it's correct.

Nicholas Birdcage Co. 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 cas 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? I got $7 million

B. If the company can earn 9% per annum on freed-up funds, how much will the income be? I got, $630,000,000

C. If the annual cost of the new system is $700,000, should it be implemented? I said yes.

Explanation / Answer

a) The free funds has added to $7 million which is the correct option. b) If the company can earn 9% on freed-up funds, then the interest rate is calculated as                               Interest amount = 9% ($7,000,000)                                                      = 0.09 ($7,000,000)                                                      = $630,000 Therefore, the interest income per annum will be $630,000 c) The annual cost of the new system is given as $700,000 But the interest income per annum is $630,000 Since the cost of the new system is more than the interest income, it should not be implemented.

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