Coyote Valley Products
Coyote Valley Products has daily cash collections of $500,000. The cash management staff has determined (1) customers’ payments are in the mail an average of 3 days; (2) processing after receipt averages 1 day; and (3) after deposit funds are cleared on average in 2 days. Assume a 365 day year.

-If Coyote Valley Products faces a 9% opportunity cost of funds,what is the value of reducing float by 2 days?

Question

Coyote Valley Products
Coyote Valley Products has daily cash collections of $500,000. The cash management staff has determined (1) customers’ payments are in the mail an average of 3 days; (2) processing after receipt averages 1 day; and (3) after deposit funds are cleared on average in 2 days. Assume a 365 day year.

-If Coyote Valley Products faces a 9% opportunity cost of funds,what is the value of reducing float by 2 days?

Quizplus · Accepted Answer

The total float time is 6 days (3 days mail + 1 day processing + 2 days clearing). Reducing float by 2 days means funds are available 2 days earlier. The daily cash collection is $500,000, so reducing float by 2 days frees up $1,000,000 ($500,000 x 2). The opportunity cost of these funds is 9% annually, so the value of reducing float by 2 days is $1,000,000 x 9% = $90,000.

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