7.1 Cost-benefit analysis of cash management (LO2) City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. The collection time has been reduced by two days and the disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.
a. If City Farm has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?
b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?
7-1. Solution:
City Farm Insurance
a.
Cash feed up=(daily collections ×days reduced)+(daily discbursement×days increased)
=($x,xxx,xxx ×2)+($x,xxx,xxx×1)
=$xx, xxx, xxx
b.
Amount earned in short term investments=Free up funds ×interest rate
=$xx, xxx, xxx ×xx%
=$x, xxx, xxx
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