Chapter 19 - Cash and Liquidity Management Chapter 19 Cash and Liquidity Management Multiple Choice Questions Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor DLK is a sole proprietorship An unexpected family situation has caused the owner to suddenly want to retire and relocate closer to his family Thus, the assets of DLK are being offered to RB Enterprises at a bargain basement price While RB Enterprises had not anticipated purchasing these assets, it was decided that the opportunity was too good to pass up This illustrates which of the following needs to hold cash? A precautionary B transaction C speculative D compensation E float GT Motors regularly issues short-term debt to finance its daily operations Suddenly, the credit markets froze and no funds were available for borrowing Fortunately, the firm had some cash reserves saved that it was able to use to fund its operations until additional credit was available The need to retain cash for situations such as this is referred to as which one of the following motives for holding cash? A speculative B float C compensating D precautionary E transaction The cash found in a cash drawer that a check-out clerk uses to make change is an example of which of the following motives for holding cash? A speculative B daily float C compensating balance D precautionary E transaction 19-1 Chapter 19 - Cash and Liquidity Management Float is defined as the: A amount of cash a firm can immediately withdraw from its bank account B difference between book cash and bank cash C change in a firm's cash balance from one accounting period to the next D amount of cash a firm has on hand E cash balance according to a firm's records A lockbox is a: A special safe used by a firm for overnight storage of any cash or undeposited checks B special safe used by a firm that can only be opened at prespecified times of the day C box located in a bank's vault that is rented by a firm and used to hold unprocessed checks D special post office box which can only be opened by prespecified postal inspectors for direct delivery to the addressee E post office box strategically located so that a firm's receivables can be collected faster The Presque Isle Center has branch operations in three states Each branch deals with a local bank However, all excess funds in these branch bank accounts are transferred on a daily basis to the firm's primary bank located near the firm's home office This routine of transferring cash to the primary bank on a regular basis is referred to as: A cash concentration B strategic cash disbursement C transfer flotation D payables management E float management An account into which funds are deposited only in an amount equal to the value of the checks presented for payment that day is called a _ account A lockbox B concentration C zero-balance D compensating balance E revolving 19-2 Chapter 19 - Cash and Liquidity Management An account into which a firm transfers funds, usually from a master account, in an amount sufficient to cover the checks presented for payment that day is called a _ account A lockbox B cleanup C compensating balance D revolving E controlled disbursement The Snow Hut has analyzed the carrying and shortage costs associated with its cash holdings and determined that the firm should ideally maintain a cash balance of $3,600 This $3,600 represents which one of the following to the firm? A target cash balance B concentration balance C available balance D selected cash amount E compensating balance 10 Adjustment costs is another name for which one of the following? A borrowing costs B shortage costs C cash transfer costs D cash wire costs E excess cash costs 11 Why firms need liquidity? I to meet compensating balance requirements II to take advantage of an opportunity that suddenly arises III to conduct daily business activities IV to be prepared for a financial emergency A I and II only B III and IV only C I, III, and IV only D II, III, and IV only E I, II, III, and IV 19-3 Chapter 19 - Cash and Liquidity Management 12 Cash management primarily involves: A optimizing a firm's collections and disbursements of cash B maximizing the income a firm earns on its cash reserves C reconciling a firm's book balance with its bank balance D determining the optimal level of liquidity a firm should maintain E determining the best method of raising capital 13 Disbursements float: A occurs when a deposit is recorded but the funds are unavailable B causes the book balance to exceed the bank balance C has tended to increase since the enactment of the Check Clearing Act for the 21st Century D is a recommended source of funds for short-term investments E is eliminated when payments are made electronically 14 Collection float: A is more desirable to firms than disbursement float B is totally eliminated by the installation of a lockbox system C exists when a firm's available balance exceeds its book balance D can be avoided by collecting payments electronically at the time of sale E is eliminated by implementing a concentration banking system 15 Which one of the following statements is correct? A Net float decreases every time a firm issues a check to pay one of its suppliers B A positive net float indicates that collection float exceeds disbursements float C Firms prefer a zero net float over a positive net float D Net float is equal to collection float minus disbursement float E Net float is equal to a firm's available balance minus its book balance 16 Check kiting is: A used by most firms as an ethical means of handling its cash reserves B the process of withdrawing all funds from a bank account as soon as the funds are available C the central core of a good cash management system D using uncollected cash to invest in short-term, liquid assets E increasingly popular due to recent banking law changes 19-4 Chapter 19 - Cash and Liquidity Management 17 Which of the following will reduce collection time? I billing customers electronically rather than by mail II accepting debit cards but not checks as payment for a sale III offering cash discounts for early payment IV reducing the processing delay by one day A I and II only B I and III only C I, II, and III only D II, III, and IV only E I, II, III, and IV 18 Which of the following should help reduce the total collection time for a firm? I opening a post office box so mail can be received earlier in the morning II assigning additional staff in the morning to process incoming payments III providing a discount for customers who pay electronically IV establishing preauthorized payments from customers A I and II only B III and IV only C II, III, and IV only D I, II, and IV only E I, II, III, and IV 19 Which one of the following collection times is correctly described? A The processing delay starts when a firm mails out a billing statement and ends when the payment is received from a customer B Mailing time begins when a firm mails out a billing statement and ends when the payment is received C Collection time begins when a firm mails out a billing statement and ends when the cash payment for that billing is available to the firm D Availability delay begins when a firm deposits a customer's check into its bank account and ends when the cash from that payment is available to the firm E Processing delay begins when a firm mails out billing statements and ends when the firm deposits the payment for that statement into its bank account 19-5 Chapter 19 - Cash and Liquidity Management 20 A lockbox system: A entails the use of a bank which is centrally located to collect payments on a nationwide basis B is designed to deposit a customer's check into the firm's bank account prior to recording the receipt of that check to a customer's account C is used to reduce the disbursement float of a firm D is efficient regardless of the locations selected for lockbox destinations E automatically records payments to a customer's account when the customer's check is received at the lockbox location 21 Lockboxes: A should be geographically located close to a firm's primary customers B should be located in remote locations to increase the net disbursement float C offer no additional benefit to a firm now that the Check Clearing Act for the 21st Century has been enacted D tend to be negative net present value projects for firms with a large number of sizeable transactions E tend to also be used as concentration accounts 22 Cash concentration accounts: A tend to increase the funds available for short-term investing B tend to increase the complexity of a firm's cash management system C that utilize wire transfers rather than automated clearing house transfers are less expensive to maintain D receive checks directly from all of a firm's customers E are all zero-balance accounts 23 Which one of the following statements is correct? A Funds received via automated clearinghouse transfers are available that day B A depository transfer check is the most costly means of transferring funds into a cash concentration account C The means selected to transfer funds into a concentration account depends primarily upon the size of the transfers D Concentration accounts are used to transfer funds to lockbox locations as needed E The most expedient means of transferring funds into a concentration account is a wire transfer 19-6 Chapter 19 - Cash and Liquidity Management 24 A cash concentration account: A is frequently used as a source of funds for short-term investments B cannot be used to cover a compensating balance requirement C cannot be used to transfer funds into zero-balance accounts D is generally the only bank account a firm needs to efficiently manage its cash E is another name for a controlled disbursement account 25 The main purpose of a cash concentration account is to: A decrease collection float B decrease disbursement float C consolidate funds D replace a lockbox system E cover compensating balance requirements 26 Which one of the following statements is correct concerning a cash management system that employs both lockboxes and a concentration bank account? A All customer payments must be submitted to a lockbox B The party which collects the checks from the lockbox is responsible for recording the payment on the customer's account C Payments received in a lockbox are transferred immediately to the concentration account D The firm's cash manager determines how the funds in the concentration account are disbursed E The concentration account must be zeroed out on a daily basis 27 A zero-balance account: A is used to cover the compensating balance requirement of a line of credit agreement B is only used to deposit funds received at local lockboxes C is funded on an as-needed basis only D is limited to handling payroll disbursements E requires a compensating balance 19-7 Chapter 19 - Cash and Liquidity Management 28 Which one of the following statements is correct concerning zero-balance accounts? A Each zero-balance account is offset by a compensating balance account B Zero-balance accounts are used for depositing incoming funds C A master account must be used in conjunction with a zero-balance account D Zero-balance accounts are used solely in conjunction with a lockbox system E Zero-balance accounts are still required to maintain a minimal balance 29 Which one of the following statements is correct? A The money market refers to securities that mature in two years or less B Banks are prohibited from investing cash surpluses on behalf of their customers on a shortterm basis C Short-term securities tend to have a high degree of interest rate risk D A cyclical firm may purchase marketable securities as part of its short-term financing plan E Corporations are not permitted to invest in money market mutual funds but can invest in bank money market accounts 30 Which two of the following are the primary reasons why firms temporarily accumulate large cash surpluses? I cyclical activities II desire to invest funds III daily operations IV fixed asset purchases A I and III only B II and IV only C I and II only D III and IV only E I and IV only 31 Which one of the following statements is correct? A Money market accounts are low-risk, high-return investments B The rate of return earned on short-term securities tends to exceed that earned on long-term securities C U.S Treasury bills are well suited for short-term investments D The income earned on U.S Treasury bills is exempt from all taxation E Short-term investments tend to have high levels of default risk 19-8 Chapter 19 - Cash and Liquidity Management 32 Municipal bonds: A are less liquid than U.S Treasury bills B produce income that is subject to federal income taxation C generally pay a higher coupon than corporate bonds D are also referred to as commercial paper E are issued by the federal government 33 Money market securities have which of the following characteristics? I long maturities II low default risk III high degree of liquidity IV low rates of return A I and III only B II and III only C I and IV only D II, III, and IV only E I, II, III, and IV 34 A jumbo CD: A is issued by the federal government B generally matures between and years C is a loan of $100,000 or more to a municipality D is a loan of $1 million or more on a short-term basis E is a short-term loan of $100,000 or more to a commercial bank 35 Brown Trucking is buying a U.S Treasury bill today with the understanding that the seller will buy it back tomorrow at a slightly higher price This investment is known as a: A commercial paper transaction B repurchase agreement C private certificate of deposit D revenue anticipation note E bill anticipation note 19-9 Chapter 19 - Cash and Liquidity Management 36 A repurchase agreement generally has a maximum life of: A day B a few days C one month D one to three months E three to six months 37 A money market preferred stock: A has a floating dividend B is sold only under a repurchase agreement C is a special form of commercial paper D has more price volatility than an ordinary preferred E has its interest rate reset daily 38 Which of the following costs related to holding cash are minimized when the level of cash a firm holds is optimized? A opportunity costs B trading costs C total costs D both trading and opportunity costs E trading costs, opportunity costs, and total costs 39 Which of the following statements related to the BAT model is correct? I The BAT model is used to determine the target cash balance for a firm II The BAT model is rarely used in business due to its complex nature III The BAT model is a model that helps eliminate a firm's collection float IV One disadvantage of the BAT model is the fact that it assumes all cash outflows are known with certainty A I and II only B III and IV only C II and III only D I and III only E I and IV only 19-10 Chapter 19 - Cash and Liquidity Management 77 Penco Supply spends $428,000 a week to pay bills and maintains a lower cash balance limit of $75,000 The standard deviation of its disbursements is $18,900 The applicable interest rate is percent and the fixed cost of transferring funds is $65 What is the firm's optimal initial cash balance based on the BAT model? A $150,600 B $158,929 C $170,096 D $221,506 E $240,553 Optimal initial cash balance = AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: BAT model 78 Your firm spends $54,000 a week to pay bills and maintains a lower cash balance limit of $45,000 The standard deviation of your disbursements is $12,100 The applicable interest rate is 4.5 percent and the fixed cost of transferring funds is $55 What is your opportunity cost of holding cash based on the BAT model? A $1,318 B $1,864 C $2,204 D $2,311 E $3,709 Opportunity cost = AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: BAT model 19-76 Chapter 19 - Cash and Liquidity Management 79 Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance limit of $95,000 The standard deviation of the disbursements is $14,600 The applicable interest rate is 4.8 percent and the fixed cost of transferring funds is $50 What is this firm's total cost of holding cash based on the BAT model? A $1,431 B $2,862 C $3,034 D $4,912 E $4,946 Optimal initial cash balance = Opportunity cost = Trading cost = [52/($103,037.21/$98,000)]  $50 = $2,472.893 Total cost = $2,472.893 + $2,472.893 = $4,946 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: BAT model 19-77 Chapter 19 - Cash and Liquidity Management 80 Your firm spends $346,000 a week to pay bills and maintains a lower cash balance limit of $150,000 The standard deviation of your disbursements is $28,700 The applicable interest rate is percent and the fixed cost of transferring funds is $60 What is your optimal average cash balance based on the BAT model? A $103,900 B $146,500 C $182,200 D $207,800 E $249,900 Optimal average cash balance = AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: BAT model 81 The Cow Pie Spreader Co spends $214,000 a week to pay bills and maintains a lower cash balance limit of $175,000 The standard deviation of the disbursements is $16,000 The applicable weekly interest rate is 0.025 percent and the fixed cost of transferring funds is $49 What is the firm's cash balance target based on the Miller-Orr model? A $208,511 B $247,560 C $251,006 D $254,545 E $258,878 Cash balance target = $175,000 + [0.75  $49  ($16,0002/.00025)]1/3 = $208,511 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: Miller-Orr model 19-78 Chapter 19 - Cash and Liquidity Management 82 The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and maintains a lower cash balance limit of $250,000 The standard deviation of the disbursements is $46,800 The applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds is $60 What is the hotel's optimal upper cash limit based on the Miller-Orr model? A $430,836 B $447,905 C $528,700 D $739,459 E $861,672 Cash balance target = $250,000 + [0.75  $60  ($46,8002/.00045)]1/3 = $310,278.70 Upper cash limit =  $310,278.70 - (2  $250,000) = $430,836 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: Miller-Orr model 83 Donaldson, Inc spends $94,000 a week to pay bills and maintains a lower cash balance limit of $50,000 The standard deviation of the disbursements is $13,000 The applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds is $52 What is your optimal average cash balance based on the Miller-Orr model? A $78,778 B $82,623 C $231,969 D $236,334 E $247,868 Cash balance target = $50,000 + [0.75  $52  ($13,0002/.00045)]1/3 = $74,466.94 Average cash balance = [(4  $74,466.94) - $50,000]/3 = $82,623 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: Miller-Orr model 19-79 Chapter 19 - Cash and Liquidity Management 84 The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance limit of $60,000 The standard deviation of the disbursements is $7,500 The applicable weekly interest rate is 0.04 percent and the fixed cost of transferring funds is $50 What is your optimal average cash balance based on the Miller-Orr model? A $79,116 B $83,208 C $110,315 D $237,348 E $249,624 Cash balance target = $60,000 + [0.75  $50  ($7,5002/.0004)]1/3 = $77,405.96 Average cash balance = [(4  $77,405.96) - $60,000]/3 = $83,208 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: Miller-Orr model 85 Your firm spends $48,000 a week to pay bills and maintains a lower cash balance limit of $50,000 The standard deviation of the disbursements is $8,600 The applicable weekly interest rate is 0.054 percent and the fixed cost of transferring funds is $65 What is your cash balance target based on the Miller-Orr model? A $48,156 B $49,990 C $54,884 D $68,830 E $75,726 Cash balance target = $50,000 + [.75  $65  ($8,6002/.00054)]1/3 = $68,830 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: Miller-Orr model 19-80 Chapter 19 - Cash and Liquidity Management 86 Travel Inn Express spends $109,000 a week to pay bills and maintains a lower cash balance limit of $125,000 The standard deviation of the disbursements is $14,400 The applicable weekly interest rate is 0.039 percent and the fixed cost of transferring funds is $58 What is the inn's cash balance target based on the Miller-Orr model? A $28,492 B $31,359 C $153,492 D $156,359 E $225,417 Cash balance target = $125,000 + [0.75  $58  ($14,4002/.00039)]1/3 = $153,492 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 19-3 Section: 19.A Topic: Miller-Orr model Essay Questions 87 Explain how a lockbox system operates and why a firm might consider implementing such a system A lockbox system entails opening post office boxes in various geographic locations These locations are selected such that they are close to the firm's key customers At each of those sites, a representative from a local bank collects the incoming checks and deposits them into the firm's account The information on the deposits is forwarded to the firm so customer accounts can be credited for the payments The firm transfers funds from these remote bank accounts into one or more centralized bank accounts on a routine basis A lockbox system reduces mailing and processing times, and creates a one-time cash inflow for the firm Feedback: Refer to section 19.3 AACSB: Reflective thinking Bloom's: Application Difficulty: Basic Learning Objective: 19-2 Section: 19.3 Topic: Lockbox systems 19-81 Chapter 19 - Cash and Liquidity Management 88 Explain how the Check Clearing Act for the 21st Century affects both collection and disbursement float Check 21 eliminated the need to present an original check to the check writer's bank to receive payment Now, the bank receiving the check as a deposit can electronically transmit a copy of the check to the check writer's bank and receive immediate payment This reduces both collection and disbursement float times Feedback: Refer to section 19.2 AACSB: Reflective thinking Bloom's: Comprehension Difficulty: Basic Learning Objective: 19-1 Section: 19.2 Topic: Check Clearing Act for the 21st Century 89 Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking Whenever cash is moved electronically, both collection and disbursement float disappears Reducing float limits the ability of a firm to earn income by investing uncollected cash Feedback: Refer to section 19.2 AACSB: Reflective thinking and Ethics Bloom's: Comprehension Difficulty: Basic Learning Objective: 19-1 Section: 19.2 Topic: Internet banking 19-82 Chapter 19 - Cash and Liquidity Management 90 Float management systems may provide only minimal benefits to a firm Given that most firms have other projects with higher positive net present values, why should a firm's managers spend time implementing a float management system? Students should explain that any project with a positive net present value adds value to the overall firm and should be implemented Generally speaking, the majority of employee or management time required by a float management system is spent on the implementation of the system Once the system is in place, management and employee time required for float management tends to be rather minimal Feedback: Refer to section 19.2 AACSB: Reflective thinking Bloom's: Application Difficulty: Basic Learning Objective: 19-1 Section: 19.2 Topic: NPV of float management 91 Explain what a zero-balance account is, how it is used, and how it affects cash management A zero-balance account is a checking account which is frequently used either for payroll or accounts payable purposes Funds are transferred from a master account into the zero-balance account only as needed to cover checks presented for payment All excess funds are held in the master account By concentrating the firm's safety stock of cash in one account, the firm can better utilize its funds Feedback: Refer to section 19.4 AACSB: Reflective thinking Bloom's: Comprehension Difficulty: Basic Learning Objective: 19-2 Section: 19.4 Topic: Zero-balance accounts 19-83 Chapter 19 - Cash and Liquidity Management Multiple Choice Questions 92 Each business day, on average, a company writes checks totaling $26,000 to pay its suppliers The usual clearing time for the checks is days Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $40,000 The cash from the payments is available to the firm after days What is the amount of the firm's average net float? A $30,00 B $50,000 C $80,000 D $110,000 E $130,000 Net float = 5($26,000) - 2($40,000) = $50,000 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-2 Learning Objective: 19-1 Section: 19.2 Topic: Net float 93 Purple Feet Wine, Inc receives an average of $6,000 in checks per day The delay in clearing is typically days The current interest rate is 0.025 percent per day Assume 30 days per month What is the highest daily fee the company should be willing to pay to eliminate its float entirely? A $1.50 B $3.00 C $3.75 D $4.50 E $6.00 Maximum daily fee = ($6,000  3)  0.00025 = $4.50 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-3 Learning Objective: 19-1 Section: 19.2 Topic: Cost of float 19-84 Chapter 19 - Cash and Liquidity Management 94 Your neighbor goes to the post office once a month and picks up two checks, one for $18,000 and one for $4,000 The larger check takes days to clear after it is deposited; the smaller one takes days Assume 30 days per month What is the weighted average delay? A 4.21 days B 4.36 days C 4.78 days D 5.00 days E 6.00 days Total monthly receipts = $18,000 + $4,000 = $22,000 Weighted average delay = [($18,000/$22,000)  4] + [($4,000/$22,000)  6] = 4.36 days AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-4 Learning Objective: 19-1 Section: 19.2 Topic: Weighted average delay 95 Your firm has an average receipt size of $60 A bank has approached you concerning a lockbox service that will decrease your total collection time by day You typically receive 28,000 checks per day The daily interest rate is 0.016 percent What is the NPV of the lockbox project if the bank charges a fee of $210 per day? A $367,500 B $427,500 C $903,350 D $1,412,500 E $1,680,000 NPV of service = $60(28,000) - ($210/0.00016) = $367,500 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-5 Learning Objective: 19-2 Section: 19.3 Topic: Lockbox NPV 19-85 Chapter 19 - Cash and Liquidity Management 96 A mail-order firm processes 5,000 checks per month Of these, 55 percent are for $55 and 45 percent are for $65 The $55 checks are delayed days on average; the $65 checks are delayed days on average Assume each month has 30 days The interest rate is percent per year How much should the firm be willing to pay to reduce the weighted average float by 1.4 days? A $4,165 B $13,883 C $41,650 D $138,883 E $416,500 Maximum payment = Average daily float = 1.4{[(0.55  5,000  $55) + (0.45  5,000  $65)]/30} = $13,883 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-6 Learning Objective: 19-1 Section: 19.2 Topic: Average daily float 19-86 Chapter 19 - Cash and Liquidity Management 97 Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time It has determined the following: The total collection time will be reduced by days if the lockbox system is adopted What is the NPV of adopting the lockbox system? A $600,000 B $775,000 C $975,000 D $1,200,000 E $1,425,000 NPV = (2  300  $4,000) - [($0.65  300)/0.0002] = $1,425,000 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-7 Learning Objective: 19-2 Section: 19.3 Topic: Lockbox NPV 19-87 Chapter 19 - Cash and Liquidity Management 98 Home Roasted Turkeys disburses checks every weeks that average $70,000 and take days to clear How much interest can the company earn if it delays transfer of funds from an interest-bearing account that pays 0.02 percent per day for these days? Ignore the effects of compound interest Assume 52 weeks in a year A $36 B $91 C $182 D $364 E $910 Interest = $70,000 (5) (52/4) (0.0002) = $910 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-9 Learning Objective: 19-2 Section: 19.3 Topic: Value of delay 99 Never Again Enterprises has an agreement with The Worth Bank whereby the bank handles $3.12 million in collections a day and requires a $1,000,000 compensating balance Never Again is contemplating canceling the agreement and dividing its eastern region so that two other banks will handle its business Banks A and B will each handle $1.56 million of collections a day, and each requires a compensating balance of $1,550,000 Never Again's financial management expects that collections will be accelerated by one day if the eastern region is divided The T-bill rate is percent annually What is the amount of the annual net savings if this plan is adopted? A $10,200 B $51,000 C $76,500 D $102,000 E $125,000 NPV = $3,120,000 - [2($1,550,000) - $1,000,000] = $1,020,000 Net savings = 0.05($1,020,000) = $51,000 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 19-10 Learning Objective: 19-2 Section: 19.3 Topic: NPV of float reduction 19-88 Chapter 19 - Cash and Liquidity Management 100 Mountaintop Inns, a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area It therefore is considering using a lockbox system offered by a bank located in Pittsburgh, Pennsylvania The bank has estimated that use of the system will reduce collection time by one day In addition to the variable charge shown below, there is also a fixed charge of $4,320 per year for the lockbox system Assume a year has 365 days What is the NPV of the lockbox system given the following information? A -$156,727 B -$131,301 C -$74,208 D $11,507 E $26,433 NPV = (1  750  $1,800) - [($0.30  750)/(1.061/365 - 1)] - [$4,320/0.06] = -$131,301 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 19-11 Learning Objective: 19-2 Section: 19.3 Topic: Lockbox NPV 19-89 Chapter 19 - Cash and Liquidity Management 101 Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast A Philadelphia-area bank will provide this service for an annual fee of $25,000 plus 10 cents per transaction The estimated reduction in collection and processing time is one day The average customer payment in this region is $8,200 Treasury bills are currently yielding percent per year Assume a year has 365 days Approximately how many customers each day, on average, are needed to make the system profitable for Cow Chips, Inc.? A 56 B 67 C 74 D 83 E 89 NPV = = ($8,200   N) - ($0.10  N)/0.000134 - $25,000/0.05 N = 67 customers per day AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 19-12 Learning Objective: 19-2 Section: 19.3 Topic: Transactions required 19-90 ... states Each branch deals with a local bank However, all excess funds in these branch bank accounts are transferred on a daily basis to the firm's primary bank located near the firm's home office... defined as the: A amount of cash a firm can immediately withdraw from its bank account B difference between book cash and bank cash C change in a firm's cash balance from one accounting period to... deposits the payment for that statement into its bank account 19-5 Chapter 19 - Cash and Liquidity Management 20 A lockbox system: A entails the use of a bank which is centrally located to collect