Chapter 3: Q1BP_a (page 220)

City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm’s checks will take longer to clear the bank. Collection time has been reduced by two days and 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?

Short Answer

Expert verified

The cash management has freed up $13,000,000.

Step by step solution

Meaning of cash management system

The cash management system is the management process that helps the organization in controlling its cash inflows and outflows. Cash management is important for maintaining the financial stability of the organization.

Money freed up by the cash management system.

The cash management system has freed up $13,000,000.

$\begin{array}{rcl} C h a n g e i n c o l l e c t i o n & = & P e r d a y c o l l e c t i o n \times R e d u c t i o n i n c o l l e c t i o n t i m e \\ = & $ 5, 000, 000 \times 2 d a y s \\ = & $ 10, 000, 000 \end{array}$

$\begin{array}{rcl} C h a n g e i n d i s b u r s e m e n t s & = & P e r d a y d i s b u r s e m e n t \times I n c r e a s e i n d i s b u r s e m e n t s \\ = & $ 3, 000, 000 \times 1 d a y s \\ = & $ 3, 000, 000 \end{array}$

$\begin{array}{rcl} F r e e d u p c a s h & = & I n c r e a s e i n c o l l e c t i o n + D e l a y e d i n d i s b u r s e m e n t \\ = & $ 10, 000, 000 + $ 3, 000, 000 \\ = & $ 13, 000, 000 \end{array}$

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Short Answer

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Meaning of cash management system

Money freed up by the cash management system.

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