The Polar Corporation has daily cash receipts of $90,000. A recent analysis of its collections indicated that customers' payments were in the mail an average of 4 days. Once received, the payments are processed in 1 1/2 days. After payments are deposited, it takes an average of 2 1/2 days for these receipts to clear the banking system. If the firm's opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee of $8,000 to reduce collection float by 2 days?

Question

Quizplus · Accepted Answer

Reducing the collection float by 2 days saves the company $90,000 * 2 = $180,000 in cash flow. The opportunity cost of this amount at 11% is $180,000 * 0.11 = $19,800. Since the cost to reduce the float is $8,000, the net benefit is $19,800 - $8,000 = $11,800.

The Polar Corporation Has Daily Cash Receipts of $90,000