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 an 8% opportunity cost of funds,what is the most it would pay to implement a lock-box system that reduces collection float by 2 days?

Question

Quizplus · Accepted Answer

The most Coyote Valley Products would pay to implement a lock-box system is calculated by determining the value of reducing the collection float by 2 days. The daily opportunity cost is calculated as $500,000 * 8% / 365 = $109.59. Reducing the float by 2 days saves 2 * $109.59 * 365 = $79,890.50, which is approximately $80,000.

Coyote Valley Products Has Daily Cash Collections of $500,000