Galway's sales average $12 million per day. If Galway could reduce the time between a customer's mailing date and when these payments are available to Galway by 3 days, what would be the resulting annual increase in earnings if the opportunity cost of funds is 9.25%?

Question

Quizplus · Accepted Answer

To find the annual increase in earnings, we need to find the daily increase and then multiply it by the number of days in a year.

Daily sales average = $12 million
Reduction in time = 3 days
Opportunity cost of funds = 9.25%

To find the daily increase, we need to calculate the interest saved by reducing the time between a customer's mailing date and when these payments are available to Galway by 3 days.

Interest rate = 9.25% = 0.0925
Interest saved per day = $12 million x 0.0925 x (3/365) = $95,342.47

Therefore, the daily increase in earnings would be $95,342.47.

To find the annual increase, we need to multiply the daily increase by the number of days in a year.

Days in a year = 365
Annual increase in earnings = $95,342.47 x 365 = $34,816,685.55

Therefore, the resulting annual increase in earnings if Galway could reduce the time between a customer's mailing date and when these payments are available to Galway by 3 days would be $3.33 million (rounded to the nearest hundredth).

Galway's Sales Average $12 Million Per Day