Proposal #2 would establish local collection centers throughout the region to decrease the time it takes...

Proposal #2 would establish local collection centers throughout the region to decrease the time it takes to convert credit payments that are mailed in by check to cash. It is estimated that establishing these collection centers would reduce the average collection time by 2 days.

If the company currently averages $50,000 in collections per day, how many dollars will this suggested cash management system free up?

If all freed up dollars would be used to pay down debt that has an interest rate of 6%, how much money could be saved each year in interest expense?

Do the numbers suggest that this new system should be implemented if its total annual cost is $8000? Explain.

Expert Solution

Amount of dollars that will be freed =Collection per day*2 =50000*2=100000
Amount of savings in interest payment =100000*6% =6000
NO it should not be implemented if annual cost is 8000 as the interest savings is less than the cost and hence there will be net expenditure of 2000

jeff jeffy answered 2 years ago

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