Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers' payments were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banking system. If the firm's opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee of $16,500 to reduce collection float by 3 days? Explain why or why not.

Question

Simon Corporation has daily cash receipts of $65,000.  A recent analysis of its collections indicated that customers' payments were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banking system. If the firm's opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee of $16,500 to reduce collection float by 3 days? Explain why or why not.

anonymous · Answer

Since daily cash receipts are $65,000, the yearly cash recieipts would be 365($65,000), or $23,725,000 per year.

The opportunity cost of 11% is .11($23,725,000) or $2,609,750 per year.

The opportunity cost  of 3 days out 7 days would be 3/7($2,609,750) or $1,118,464 per year.

So it would be a no brainer to spent $16,500 a year to make $1,118,464 a year.