The Essex Company found that an average of 10 days elapses between the time a customer's payments are received and the deposited funds clear the customer's bank and become usable by the firm. Essex's annual sales are $240 million. (Assume 365 days per year when converting from annual data to daily data or vice versa.) Suppose Essex can reduce the time required to process customer payments by 4 days through more efficient payment processing methods. Given these additional funds can be used to reduce the firm's outstanding bank loans (10% interest rate), what is the annual pretax savings in interest expense?

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The correct answer is A.The annual pretax savings in interest expense can be calculated as follows:Annual sales = $240 millionAverage days between receipt of payment and clearance = 10 daysReduction in processing time = 4 daysNew average days between receipt of payment and clearance = 10 days - 4 days = 6 daysInterest rate = 10%Annual pretax savings in interest expense = (Annual sales * Reduction in processing time / 365 days) * Interest rate= ($240 million * 4 days / 365 days) * 10%= $263,013.69

The Essex Company Found That an Average of 10 Days