Reference no: EM132516445

(a) Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collection indicated that customers' payments were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banking system.

(i) How much collection float (in days) does the firm currently have?

(ii) If the firm's opportunity cost is 11 percent, would it be economically advisable for the firm to pay an annual fee of $16,500 to reduce collection float by 3 days? Explain why or why not.

(b) Jack Wilshire Manufacturing Company pays accounts payable on the tenth day after purchase. The average collection period is 30 days, and the average age of inventory is 40 days. The firm currently has annual sales of about $18 million. The firm is considering a plan that would stretch its accounts payable by 20 days (currently it is 10 days). Assume no difference in the investment per dollar of sales in inventory, receivables, and payables; no discount for early payment of accounts payable; and a 360-day year.

i) If the firm pays 12 percent per year for its resource investment, what annual savings can it realize by this plan?