Chapter 3: Q2BP_b (page 220)

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.
b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?

Short Answer

Expert verified

The investment income generated from freed-up funds will be $436,500.

Step by step solution

Importance of the interest rates in short-term investments

The investor considers the interest rates offered on short-term investments to determine the interest income that can be earned by the investor. This rate influences the amount of money to be invested and the time period of investment

Money freed up by the cash management system.

The interest earned on short-term investments is $436,500.

$\begin{array}{rcl} I n t e r e s t o n s h o r t - t e r m i n v e s t m e n t & = & F r e e d u p f u n d s \times I n t e r e s t r a t e \\ = & $ 7, 275, 000 \times 6 % \\ = & $ 436, 500 \end{array}$

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Temporary current assets	\)1,000,000
Permanent current assets	\(2,000,000
Fixed assets	\)1,200,000
Total assets	\(4,200,000

January	\(28,000
February	\)19,000
March	\(12,000
April	\)14,000
May	\(8,000
June	\)6,000
July	\(22,000
August	\)26,000
September	\(29,000
October	\)34,000
November	\(42,000
December	\)24,000
Total annual sales	\(264,000

January	\(28,000
February	\)19,000
March	\(12,000
April	\)14,000
May	\(8,000
June	\)6,000
July	\(22,000
August	\)26,000
September	\(29,000
October	\)34,000
November	\(42,000
December	\)24,000
Total annual sales	\(264,000

Short Answer

Step by step solution

Importance of the interest rates in short-term investments

Money freed up by the cash management system.

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