Foundations of Financial Management fifteenth edition

Chapter 7: Current Asset Management

Basic Problems

Cost-benefit analysis of cash management:

1. City Farm Insurance has collection centers across the country to speed up collections. The company also makes it 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 daybecause 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 manaement system freed up?

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?

Average collection period:

5. Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000. Compute the value of the average collection period.