Management of the firm retail cash collection system

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Reference no: EM131334512

1. As cash manager for an oil company, you are responsible for the firm’s cash management activities. One of these activities is the management of the firm’s retail cash collection system. Your firm receives an average of 130,000 remittances per month with an average face value of $285. Your current collection system consists of your customers remitting to your company headquarters. You estimate the average mail delay is 3 days. The typical remittance remains at headquarters for 1 day. You are informed that the average deposit receives good funds in 1.5 days.

a. Based on the given information, compute the monthly total cost for your cash collection system if your firm’s opportunity investment rate is 4% and your bank charges $0.25 per item and a monthly fixed cost of $125.

b. Your bank, interested in selling you a lockbox system, indicates that a lockbox system would reduce mail float by 2 days, processing float by 1 day, and availability float by 0.5 day. If the system charges a variable cost of $0.75 per item and monthly fixed cost of $425, should you change to the lockbox system? You may assume your opportunity investment rate remains at 4%.

Reference no: EM131334512

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