As CFO of Barracuda Diving and Marine Services, you are asked to investigate the possibility of implementing a system to expedite cash receipts from clients.

Barracuda receives check remittances totaling AED28 million

(Emirati dirham) in a year. The firm records and processes 15,000 checks in the same period. The National Bank of Abu Dhabi has informed you that it could provide the system of expediting checks and associated documents for a unit cost of AED0.27 per check. After conducting an analysis, you project that the cash freed up by the adoption of the system can be invested in a portfolio of near-cash assets that will yield an annual before-tax return of 9 percent. The company usually uses a 365-day year in its financial calculations.

a. What reduction in check collection time is necessary for Barracuda to be neither better nor worse off for having adopted the proposed system?

b. How would your solution to part (a) be affected if Barracuda could invest the freed-up balances at an expected annual return of only 5 percent?

c. What is the logical explanation for the differences in your answers to part (a) and part (b)?