2. Neon Light Company of Kansas City ships lamps and lighting appliances through

Question

2. Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establish ment of l ocal collection centers around the country, she can speed up the co llec department tio n of payments by three days. Further t her bank has indicated to her that she can defer her payments on her aco y one-half day without affecting suppliers. The bank has a remote disburse payments by three days. Furthermore, the cash management depa ment center in Florida. a. If Neon Light Company has $2.25 million per day in collections and S1.05 million per day in disbursements, how many dollars will the cash manage ment system free up?

Explanation / Answer

a) Total collections per day = $2.25 million

Days by which the collection of payments will speed up through establishment of local centers = 3

Additional collections through establishment of local centers = Daily collections * Days speed up

= $2.25 million * 3

= $6.75 million

Total disbursements per day = $1.05 million

Days by which the disbursement of payments will slow down through establishment of local centers = 0.5

Delayed disbursements through establishment of local centers = Daily disbursements * Days slow down

= $1.05 million * 0.5

= $0.525 million

Total freed up cash = Additiona; collections + Delayed disbursements

= $6.75 million + $0.525 million

= $7.275 million

b) Interest rate per annum = 6%

Freed up funds = $7.275 million

Income = Freed up funds * interest rate

= $7.275 million * 6%

= $436,500

c) Cost of the new system = $400,000

Income from the new system = $436,500

Since Income > Cost, implementing the system will be profitable and so system should be implemented

Answer: Yes. System should be implemented

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