1 Leon Dung SA, a large fertilizer distributor based in the north of Spain, is planning to use a lockbox system to speed up collections from its customers located in the Castille y Leon region. A Vallidolid-area bank will provide this service for an annual fee of €25,000 plus 10 cents per transaction. The estimated reduction in collection and processing time is one day. If the average customer payment in this region is €5,500, how many customers each day, on average, are needed to make the system profitable for Leon Dung? Treasury bills are currently yielding 5 per cent per year. (40 marks)
2 Based on the Miller–Orr model, describe what will happen to the lower limit, the upper limit, and the spread (the distance between the two) if the variation in net cash flow grows. Give an intuitive explanation for why this happens. What happens if the variance drops to zero? (30 marks)
3 Given an annual interest rate of 4 per cent, a fixed order cost of €10, and total cash needed of €5,000, calculate the target cash balance using the Baumol model. How do you interpret your answer? (30 marks)