Neon Light Company of Kansas City ships lamps and lighting appliances throughout

Question

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.  

a. If Neon Light Company has $3.15 million per day in collections and $1.23 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

b. If Neon Light Company can earn 8 percent per annum on freed-up funds, how much will the income be? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

c. If the total cost of the new system is $490,000, should it be implemented?

Explanation / Answer

a. $3,150,000 daily collections × 2 days speed up = $6,300,000 additional collections
$1,230,000 daily disbursements × .5 days slow down = $615,000 delayed disbursements
Freed Up Funds = $6,300,000 + $615,000 = $6,915,000

b. Interest Rate = 8%
Interest on Freed Up Cash = 0.08 x $6,915,000 = $553,200

c. No. The income of $553,200 is $63,200 less than the cost of $490,000

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