Cash Management Paper 2

Answer (D) is correct. A lockbox system is one strategy for expediting the receipt of funds. Customers submit their payments to a mailbox controlled by the bank rather than to the company’s offices. Bank personnel remove the envelopes from the mailbox and deposit the checks to the company’s account immediately. The remittance advices must then be transported to the company for entry into the accounts receivable system. The bank generally charges a flat monthly fee for this service.

Answer (D) is correct. The annual benefit (loss from using the bank’s proposed service is the excess (deficit) of interest earned on the early deposits over (under) the cost of the service. If the plan is adopted, the firm’s average cash balance will increase by $200,000 ($100,000 × 2 days). Benefit (loss) = Interest earned – Cost = ($200,000 × 6%) – ($500 × 12 months) = $12,000 – $6,000 = $6,000

Answer (B) is correct. The additional annual income (loss from using the bank’s proposed service is the excess (deficit) of interest earned on the early deposits over (under) the cost of the service. If the plan is adopted, the firm’s average cash balance will increase by $600,000 ($200,000 × 3 days). Benefit (loss) = Interest earned – Cost = ($600,000 × 12%) – ($4,000 × 12 months) = $72,000 – $48,000 = $24,000

Answer (C) is correct. The additional annual income (loss) from using the lockbox service is the excess (deficit) of interest earned on the early deposits over (under) the cost of the service. If the plan is adopted, the firm’s average cash balance will increase by $900,000 ($300,000 × 3 days). Benefit (loss) = Interest earned – Cost = ($900,000 × 6%) – ($2,000 × 12 months) = $54,000 – $24,000 = $30,000

Answer (B) is correct. The additional annual income (loss from using the bank’s proposed service is the excess (deficit) of interest earned on the early deposits over (under) the cost of the service. If the plan is adopted, the firm’s average cash balance will increase by $600,000 ($300,000 × 2 days). Benefit (loss) = Interest earned – Cost = ($600,000 × 11%) – ($3,000 × 12 months) = $66,000 – $36,000 = $30,000

Answer (D) is correct. The additional annual income generated by Bank 4’s lockbox service can be calculated as follows: Benefit (loss) = Interest earned – Cost = ($300,000 × 2 days × 6%) – ($1,000 × 12 months) = $36,000 – $12,000 = $24,000

Answer (D) is correct. Multiplying 700 checks times 360 days results in a total of 252,000 checks per year. Accordingly, using a $0.50 fee per check, total annual cost is $126,000 (252,000 × $.50), which is less desirable than a $125,000 flat fee. Given that the annual collections equal $453,600,000 (700 checks × $1,800 × 360 days), a fee of 0.03% of the amount collected is also less desirable because the annual fee would be $136,080 ($453,600,000 × .03%). The best option is therefore to maintain a compensating balance of $1,750,000 when the cost of funds is 7%, resulting in a total cost of $122,500 ($1,750,000 × 7%).

Answer (B) is correct. The annual benefit from using the lockbox system is the excess of interest earned on the early deposits over the cost of the service. If the plan is adopted, the firm’s average cash balance will increase by $2,000,000 ($20,000 average payment × 50 per day × 2 days). The annual variable cost will be $9,125 ($.50 per payment × 50 per day × 365 days). Benefit (loss) = Interest earned – Cost = ($2,000,000 × 6%) – ($50,000 $9,125 = $120,000 – $59,125 = $60,875

Answer (C) is correct. Checks are currently tied up for 10 1/2 days (5 for mailing, 4 for processing, and 1 1/2 for clearing . If that were reduced to 4 days, CMR’s cash balance would increase by $650,000 ($100,000 per day × 6 1/2 days).

Answer (C) is correct. The annual benefit (loss) from using the lockbox system is the excess (deficit) of interest earned on the early deposits over (under) the cost of the service. If the plan is adopted, Foster’s average cash balance will increase by $750,000 [$90,000,000 × (3 days ÷ 360 days)]. Benefit (loss) = Interest earned – Cost = ($750,000 × 8%) – $80,000 = $60,000 – $80,000 = $(20,000