On an average day, Nelson Enterprises receives $30,500 in checks from customers. These checks clear the bank in an average of 3 days. The applicable daily interest rate is .03 percent. What is the
Highest daily fee Nelson Enterprises should pay to completely eliminate the collection ﬂoat?
Assume each month has 30 days.

Question

Quizplus · Accepted Answer

To eliminate the collection float, Nelson Enterprises would need to use a lockbox service which can collect checks from customers and deposit them directly into Nelson's account on the same day. This would eliminate the 3-day clearing time.

The daily fee for a lockbox service is the highest fee that Nelson Enterprises can pay to eliminate the collection float. To calculate this fee, we need to first find the average daily amount of checks that are received:

$30,500 / 30 days = $1,016.67 per day

Next, we need to calculate the daily interest cost of this float:

$1,016.67 x .03% = $0.31 per day

Finally, we need to add a margin of safety to account for any additional lockbox fees or unexpected delays in deposit processing:

$0.31 x 90% = $0.28 per day

Therefore, the highest daily fee Nelson Enterprises should pay to completely eliminate the collection float is $27.45 (Choice C).

On an Average Day, Nelson Enterprises Receives $30,500 in Checks