On an average day, Finley, Inc. receives $3,000 in checks from customers. These checks clear the bank in an average of 2.5 days. The applicable daily interest rate is.05 %. What is the maximum amount Finley, Inc. should pay to completely eliminate the collection float? Assume each month has 30 days.

Question

Quizplus · Accepted Answer

The maximum amount Finley, Inc. should pay to eliminate the collection float can be calculated using the formula for the value of float: Float = Daily receipts × Collection delay × Daily interest rate. Here, it's $3,000 × 2.5 days × 0.0005 = $3.75. However, to find the maximum amount they should pay to eliminate this float, we consider the annual benefit of eliminating the float, which is $3,000 × 30 days × 12 months × 0.0005 = $540. The maximum amount they should be willing to pay is the present value of this annual benefit, but since the question asks for the maximum amount in a simplified context without specifying the need for present value calculation, we look at the daily cost of float ($3.75) and the annual benefit ($540) directly. None of these figures directly answer the question as posed, indicating a need to understand the question's intent differently. Given the daily receipts and the delay, the float amount is essentially the amount of money that is 'in transit' and not earning interest for Finley, Inc. This is calculated as daily receipts multiplied by the average delay: $3,000 * 2.5 = $7,500. This represents the amount of money that, on any given day, is not available to Finley, Inc. because it is being processed. Therefore, to eliminate the collection float, Finley, Inc. would need to have immediate access to an equivalent amount of money that is currently delayed, which is $7,500. This is why the correct answer is B) $7,500, as it directly addresses the question of eliminating the collection float by providing immediate access to the funds that are in the process of clearing.

On an Average Day, Finley, Inc