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.

-What would be the benefit of a lock-box system that reduced mail float by 1.5 days,eliminated processing float,and reduced clearing float by 1 day,if Coyote Valley Products faces a 9% opportunity cost of funds?

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.

-What would be the benefit of a lock-box system that reduced mail float by 1.5 days,eliminated processing float,and reduced clearing float by 1 day,if Coyote Valley Products faces a 9% opportunity cost of funds?

Quizplus · Accepted Answer

The current total float is 3 + 1 + 2 = 6 days.
If the lock-box system is implemented, the total float would be reduced to 0.5 days (1.5 - 1 - 0.5), resulting in a reduction of 5.5 days.
The opportunity cost of funds is 9%, which means that Coyote Valley Products could earn 0.09/365 = 0.00024658 per day on each dollar.
The benefit of the lock-box system would be:
Benefit = 5.5 x $500,000 x 0.00024658
Benefit = $157,501.50
Therefore, the best choice would be option B.

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