Norma’s
Cat Food of Shell Knob ships cat food throughout the country. Norma has
determined that through the establishment of local collection centers around
the country, she can speed up the collection of payments by two and one-half
days. Furthermore, the cash management department of her bank has indicated to
her that she can defer her payments on her accounts by one-half day without
affecting suppliers. The bank has a remote disbursement center in Iowa.
1. If the company has $5
million per day in collections and $3 million per day in disbursements, how
many dollars will the cash management system free up? Justify your
answers.
2. If the company can earn
8 percent per annum on freed-up funds, how much will the income be? Justify
your answers.
3. If the annual cost of
the new system is $800,000, should it be implemented? Explain why or why not.
