QUESTION: 440 Topic 8: Part 1 Sec Eight (410 to 542)

A firm has daily cash receipts of $300,000 and is interested in acquiring a lockbox service in order to reduce collection time. Bank l's lockbox service costs $3,000 per month and will reduce collection time by 3 days. Bank 2's lockbox service costs $5,000 per month and will reduce collection time by 4 days. Bank 3's lockbox service costs $500 per month and will reduce collection time by 1 day. Bank 4's lockbox service costs $1,000 per month and will reduce collection time by 2 days. If money market rates are expected to average 6% during the year, and the firm wishes to maximize income, which bank should the firm choose?

Bank 1.
Bank2.
Bank3.
Bank4.

Answer(s): D

Explanation:

Because collections made using Bank 4's lockbox service will be accelerated by 2 days at a rate of $300,000 per day, the firm will have an additional $600,000 to invest. At a rate of 6%, the interest earned will be $36,000 per year. However, the bank will charge $12,000 ($1,000 per month x 12 months) for its services. Thus, the firm will gain $24,000 ($36,000 --$12,000).

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QUESTION: 441 Topic 8: Part 1 Sec Eight (410 to 542)

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If the average age of inventory is 60 days, the average age of the accounts payable is 30 days, and the average age of accounts receivable is 45 days, the number of days in the cash flow cycle is

135 days.
90 days.
75 days.
105 days.

Answer(s): C

Explanation:

The cash flow cycle begins when the firm pays for merchandise it has purchased and ends when the firm receives cash from the sale of the merchandise. Inventory is held for an average of 60 days prior to sale, but the average age of accounts payable is 30 days. Consequently, the average time between outlay and sale is 30 days. Receivables are collected an average of 45 days after sale, so the length of the cash flow cycle is 75 days (30 + 45).

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QUESTION: 442 Topic 8: Part 1 Sec Eight (410 to 542)

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DLE is a retail mail order firm that currently uses a central collection system that requires all checks to be sent to its Boston headquarters. An average of 6 days is required for mailed checks to be received, 3 days for DLE to process them, and 2 days for the checks to clear through its bank. A proposed lockbox system would reduce the mailing and processing time to 2 days and the check clearing time to 1 day. DLF has an average daily collection of $ 150.000. If DLE adopts the lockbox system, its average cash balance will increase by

$1,200,000
$750,000
$600,000
$450,000

Answer(s): A

Explanation:

Checks are currently tied up for 11 days (6 for mailing. 3for processing, and 2for clearing). If 1, that period were reduced to 3 days, Dale's cash balance would increase by $1,200,000 ($150,000 per day x 8 days).

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QUESTION: 443 Topic 8: Part 1 Sec Eight (410 to 542)

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Troy Toys is a retailer operating in several cities. The individual store managers deposit daily collections at a local bank in a non-interest bearing checking account. Twice per week1 the local bank issues a depository transfer check (DTC)to the central bank at headquarters. The controller of the company is considering using a wire transfer instead. The additional cost of each transfer would be $25; collections would be accelerated by 2 days; and the annual interest rate paid by the central bank is 7.2%(0.02% per day). At what amount of dollars transferred would it be economically feasible to use a wire transfer instead of the DTC? Assume a 360-day year.

It would never be economically feasible.
$125000 or above.
Any amount greater than $173.
Any amount greater than $62,500.

Answer(s): D

Explanation:

Given a $25 fee and an interest rate of 0.02% per day for2 days, the breakeven amount is $62,500 [$25 transfer fee + (2 x .02% interest rate)]. Thus, the interest earned on a transfer of any amount greater than $62,500 would exceed the $25 fee.

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QUESTION: 440 Topic 8: Part 1 Sec Eight (410 to 542)

Explanation:

QUESTION: 441 Topic 8: Part 1 Sec Eight (410 to 542)

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QUESTION: 442 Topic 8: Part 1 Sec Eight (410 to 542)

Explanation:

QUESTION: 443 Topic 8: Part 1 Sec Eight (410 to 542)

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