Problem 1

A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by three days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its negotiated financing.

(a)Calculate the cash conversion cycle before and after the lockbox system.

(b) Calculate the savings in financing costs from the lockbox system.

Problem 2

A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by 3 days by reducing processing, mail, and clearing float. The firm's cash conversion cycle

A) increases by 3 days.

B) decreases by 3 days.

C) will not change.

D) is 93 days.

Problem 3

AA Inc. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. AA has the opportunity to invest the money at 24% per annum. The Company spends, on the average, P40 for every cash conversion on marketable securities.

1. What is the optimal cash conversion size?

2. How much is the total cost the Company will incur?

Problem 4

BB Co. has received proposals from several banks to establish a lockbox system to speed up receipts. BB receives an average of 700 checks per day averaging P1,800 each, and its cost of short term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which one of the following proposals is optimal for BB?

A. A P0.50 fee per check?

B. A fee of 0.03% of the amount collected.

C. A flat fee of P125,000 per year

D. A compensating balance of P1,750,000

Problem 5

CC Corp estimates its total annual cash disbursements of P3,251,250 which are to be paid uniformly. CC has the opportunity to invest the money at 9% per annum. The Company spends, on the average, P25 for every cash conversion to marketable securities and vice versa.

1. What is the optimal cash conversion size?

2. How much is the total cost the Company will incur?