Question
?( Cash management ?) As CFO of Portobello Scuba Diving Inc. you are asked to look into the possibility of adopting a lockbox system to
?(Cash
management?)
As CFO of Portobello Scuba Diving Inc. you are asked to look into the possibility of adopting a lockbox system to expedite cash receipts from clients. Portobello receives check remittances totaling
?$2626
million in a year. The firm records and processes
15 comma 00015,000
checks in the same period. The National Bank of Brazil has informed you that it could provide the service of expediting checks and associated documents through the lockbox system for a unit cost of
$ 0.25$0.25
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
1010
percent. The company usually uses a? 365-day year in its financial calculations.
a. What reduction in check collection time is necessary for Portobello to be neither better nor worse off for having adopted the lockbox? system?
b. How would your solution to part
?(a?)
be affected if Portobello could invest the? freed-up balances at an expected annual return of only
55
?percent?
c. What is the logical explanation for the differences in your answers to part
?(a?)
and part
?(b?)?
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