Question

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 three days and disbursement time increased by two days because of these policies. Excess funds are being invested in short-term instruments yielding 4 percent per annum.

a. If City Farm has $4.35 million per day in collections and $3.60 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).)

Answer 1

Solution:- Given in Question-

Collection time reduced by 3 days,

Disbursement time Increased by 2 days,

Short term investment Yield = 4%

A. If City Farm has $4.35 million per day in collections and $3.60 million per day in disbursements, how many dollars has the cash management system freed up-

Additional Collection = $4.35 Million * 3 days = $13.05 Million

Delayed Disbursement = $3.60 Million * 2 Days = $7.20 Million

Freed Up Fund = Additional Collection + Delayed Disbursement

Freed Up Fund = $13.05 Million + $7.20 Million

Freed Up Fund = $20.25 Million

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

Freed Up Fund calculated in Point A = $20.25 Million

Yield = 4%

Interest on Freed Up Cash = Freed Up Fund * Yield

Interest on Freed Up Cash = $20.25 Million * 4%

Interest on Freed Up Cash = $8,10,000.

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