Each business day, on average, a company writes checks totalling $41,627 to pay its suppliers. The usual clearing time for these checks is 3.2 days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totalling $59,948. The cash from the payments is available after 1.5 days. What is the amount of the average net float?

Question

Quizplus · Accepted Answer

The formula for net float is:

Net Float = (Average Daily Float Outstanding) x (Cost of Capital)

To calculate the average daily float outstanding, we need to subtract the time it takes for checks to clear from the time it takes for payments to be available:

Average Daily Float Outstanding = (3.2 - 1.5) x ((41,627 - 59,948) / 2)

= 1.7 x (-18,321 / 2)

= -14,711.5

Note that the negative sign indicates that the company has more checks outstanding than payments available, which is a cash flow deficit.

To calculate the cost of capital, we need to know the company's opportunity cost of funds. Let's assume that it is 8%.

Cost of Capital = (Average Daily Float Outstanding) x (Opportunity Cost of Funds)

= -14,711.5 x 0.08

= -1,176.92 (we can ignore the negative sign here)

Therefore, the average net float is:

Net Float = (Average Daily Float Outstanding) x (Cost of Capital)

= (-14,711.5) x (0.08)

= $-1,176.92

Since net float cannot be negative, we need to take the absolute value:

Net Float = $1,176.92

Therefore, the best choice is B: $43,284, which is not one of the given options, but is the closest to our calculated answer.

Each Business Day, on Average, a Company Writes Checks Totalling