14-1 Cash conversion cycle. American Products is concerned about managing cash efficiently. On the average, inventories have an average age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firms spends $30 million on operating cycle investments each year, at a constant rate. Assuming a 360-day year:

1. Calculate the firms operating cycle.
2. Calculate the firms cash conversion cycle.
3. Calculate the amount of negotiated financing required to support the firms cash conversion cycle.
4. Discuss how management might be able to reduce the cash conversion cycle.

14-14 Lockbox system. Eagle Industries feels that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments with a return of 15%. The cost of the lockbox system is $9,000 per year.

1. What amount of cash will be made available for other uses under the lockbox system?
2. What net benefit (cost) will the firm receive if it adopts the lockbox system? Should it adopt the proposed lockbox system?

14-13 Float. 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 days. Once received, the payments are processed in 1 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banking system.

1. How much collection float (in days) does the firm currently have?
2. If the firms 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.

Direct send-Single. Ocean Research of San Diego, California, just received a check in the amount of $800,000 from a customer in Bangor, Maine. If the firm processes the check in the normal manner, the funds will become available in 6 days. To speed up this process, the firm could send an employee to the bank in Bangor in which the check is drawn to present it for payment. Such action will cause the funds to become available after 2 days. If the cost of the direct send is $650 and the firm can earn 11% on these funds, what recommendation would you make? Explain.

Playing the float. Clay Travel, Inc. routinely funds its checking account to cover all checks when written. A thorough analysis of its checking account discloses that the firm could maintain an average account balance that is 25% below the current level and adequately cover all checks presented. The average account balance is currently $900,000. If the firm can earn 10% on short-terms investments, what, if any, annual savings would result form maintaining the lower average account balance?