City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers, so the firm's checks will take longer to clear the bank. Collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.

a. If City Farm has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

PART TWO:

Henderson Office Supply is considering a more liberal credit policy to increase sales but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset buildup will be required to service the new accounts.

a. What additional investment in accounts receivable is needed to support this sales expansion?

b. What would be Hendersons incremental aftertax return on investment? (Input your answer as a percent rounded to 2 decimal places.)

Assume that Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is two times.

d. What would be the total incremental investment in accounts receivable and inventory needed to support a $65,000 increase in sales?