Chapter 19

Problems 1-12, Appendix 1-10

Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green
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sis ToolPak"

Chapter 19
Question 1 Input Area:

Checks received Value of checks Days delayed Days per month

80 156,000 4 30

Output:

Average daily float

20,800.00

Chapter 19
Question 2 Input Area:

Value of checks Clearing time Received payment Clearing time b. New clearing time

$ $

14,000 4 26,000 2 1

Output:

a. Disbursement float Collection float Net float b. Disbursement float Collection float Net float

$ $ $ $ $ $

56,000 (52,000) 4,000 56,000 (26,000) 30,000

Chapter 19
Question 3 Input Area:

Value of checks per day Clearing time Interest rate Days per month

19,000 3 0.019% 30

Output:

a. Collection float

57,000

b. The firm should pay no more than $ 57,000 to eliminate the float. c. Maximum daily charge $ 10.83

Chapter 19
Question 4 Input Area:

Check #1 value Check #2 value Clearing time #1 Clearing time #2 # of days per month

$ $

17,000 6,000 4 5 30

Output:

Total float Average daily float Average daily receipts Weighted average delay

$ $ $

98,000 3,266.67 766.67 4.26

Chapter 19
Question 5 Input Area:

Average receipt Decreased collection time # Checks per day Interest rate Bank fee per day

108 2 8,500 0.016% 225

Output:

Average daily collections $ 918,000 PV $ 1,836,000 Cost $ 1,406,250 NPV $ 429,750.00 The firm should take the lockbox service. Annual savings Annual cost Annual net savings $ $ $ 110,406.05 84,563.46 25,842.59

Chapter 19
Question 6 Input Area:

# Checks per day % of check #1 Value of check #1 Average delay check #1 % of check #2 Value of check #2 Average delay check #2 d. Interest rate e. Weighted average float # of days per month

$ $

5,300 60% 55 2 40% 80 3 7% 1.50 30

Output:

a. Average daily float $ 28,620 On average, there is $ 28,620 that is uncollected and not available to the firm. b. Total collections Weighted average delay Average daily float $ $ 344,500 2.49 28,620

c. The most the firm should pay is the total amount of the average float or $ 28,620 d. Daily interest rate Daily cost of float e. Price to reduce float 0.01854% 5.31 17,225

$ $

Chapter 19
Question 7 Input Area:

Average # of payments per day Average value of payment $ Variable lockbox fee $ Daily interest rate on MM securities Decreased collection time

385 1,105 0.50 0.02% 3

Output:

a. PV b. NPV c. Net cash flow per day Net cash flow per check

$ $ $ $

1,276,275 313,775 62.76 0.16

Chapter 19
Question 8 Input Area:

# days to receive checks Average daily collections Required return Decreased collection time # of days per month # of days per year

6 145,000 9% 3 30 365

Output:

a. Reduction in outstanding cash $ b. Average daily rate Dollar return

435,000 0.0236% 102.72 0.7207% 434,897.32 3,134.45

c. Monthly rate PV of increased collections $ Assuming end of month payments: Monthly price $

Assuming payments at the beginning of the month Monthly price $ 3,112.02

Chapter 19
Question 9 Input Area:

# days to clear checks Average daily collections Interest-bearing account # weeks for checks to disburse

7 93,000 0.015% 2

Output:

Annual interest earned

2,538.90

Chapter 19
Question 10 Input Area:

Average daily collections Compensating balance T-bill rate Bank A and Bank B: Collections per day Compensating balance Collections accelerated

$ $

4,000,000 400,000 5% 2,000,000 250,000 1

$ $

Output:

NPV $ Proceed with the new system. Net savings $

3,900,000

195,000

Chapter 19
Question 11 Input Area:

Average # of payments per day Average value of payment Variable lockbox fee Annual interest rate on MM securities Fixed charges per year Reduction in collection time # of days per year

$ $ $

750 980 0.35 7.00% 5,000 2 365

Output:

PV $ Daily interest rate NPV $ The lockbox system should be accepted.

1,470,000 0.019% 54,015.17

NPV (With the fixed charge) $ (17,413.40) The lockbox system should not be accepted.

Chapter 19
Question 12 Input Area:

Annual fee Variable costs per transaction Reduction in collection Average customer payment T-bill rate # of days per year # weeks per year

$ $ $

20,000 0.10 1 5,300 5% 365 52

Output:

Daily interest rate Customers per day

0.0134% 87.87

Chapter 19 - Appendix
Question 1 Input Area:

Increase Decrease No change

I D N

Output Area:

a. D: this will lower the trading costs, which will cause a decrease in the target cash balance. b. D: this will increase the holding costs, which will cause a decrease in the target cash balance c. I: this will increase the amount of cash that the firm has to hold in non-interest bearing accounts, so they will have to raise the target cash balance to meet this requirement. d. D: if the credit rating improves, then the firm can borrow easier, allowing it to lower the targe cash balance and borrow if a cash shortfall occurs. e. I: if the cost of borrowing increases, the firm will need to hold more cash to protect against cash shortfalls as the borrowing costs become more prohibitive. f. D: this depends somewhat on what the fees apply to, but of direct fees are established, then compensating balance may be lowered, thus lowering the target cash balance. If, on the oth hand, fees are charged to the number of transactions, then the firm may wish to hold a highe cash balance so they are not transferring money into the account as often.

e a decrease in the target cash balance. ause a decrease in the target cash balance. m has to hold in non-interest bearing h balance to meet this requirement. orrow easier, allowing it to lower the target

eed to hold more cash to protect against re prohibitive. to, but of direct fees are established, then the ring the target cash balance. If, on the other ons, then the firm may wish to hold a higher nto the account as often.

Chapter 19 - Appendix
Question 2 Input Area:

Annual interest rate Fixed order cost Total cash needed

$ $

6% 25 8,500

Output Area:

C*

2,661.45

The initial balance should be $ 2,661.45 , and whenever the balance drops to $0, another $ 2,661.45 should be transferred in.

Chapter 19 - Appendix
Question 3 Input Area:

Avg. daily cash balance Total cash needed Interest rate Replenishing cost

$ $ $

1,300 43,000 5% 8

Output Area:

Holding cost $ 65.00 Trading cost $ 132.31 Total cost $ 197.31 C* $ 3,709.45 They should change their average daily cash balance to $ 1,854.72 , which would minimize their costs. The new total costs are $ 185.47

Chapter 19 - Appendix
Question 4 Input Area:

Total cash needed Transfer amount Interest rate Replenishing cost

$ $ $

16,000 1,500 5% 25

Output Area:

Opportunity cost Trading cost The firm keeps in cash because the are higher than the C*

$ $

37.50 266.67

too little trading costs opportunity costs. $ 4,000.00

Chapter 19 - Appendix
Question 5 Input Area:

Cash holding Cash needed per month Broker fee Interest rate

$ $ $

690,000 140,000 500 5.7%

Output Area:

Total cash $ 1,680,000 C* $ 171,679.02 The company should invest $ 518,320.98 of its current cash holdings in marketable securities to bring the cash balance down to the optimal level. Over the rest of the year, sell securities 9.79 times.

Chapter 19 - Appendix
Question 6 Input Area:

Lower limit Upper limit Target balance

$ $ $

43,000 125,000 80,000

Output Area:

The lower limit is the minimum balance allowed in the account, and the upper limit is the ma balance allowed in the account. When the account balance drops to the lower limit, in marketable securities will be sold, and the proceeds deposited in the account. This moves account balance back to the target cash level. When the account balance rises to the upper $45,000 of marketable securities will be purchased. This expenditure brings the ca back down to the target balance of $80,000

he account, and the upper limit is the maximum balance drops to the lower limit, $37,000 ds deposited in the account. This moves the n the account balance rises to the upper limit, then urchased. This expenditure brings the cash level

Chapter 19 - Appendix
Question 7 Input Area:

Order fixed cost Opportunity cost Standard deviation of CF Lower limit

$ $ $

40 0.021% 70 1,500

Output Area:

Variance of cash flows C* U* $ $

4,900 2,387.90 4,163.71

When the balance in the cash accounts drops to $1,500 , the firm sells $887.90 of the marketable securities. The proceeds from the sale are used to replenish the account back to the optimal level of C*. Conversely, when the upper limit is reached, the firm buys $1,775.81 of marketable securities. This expenditure lowers the cash level back down to the optimal level of $2,387.90

Chapter 19 - Appendix
Question 8 Output Area:

As the variance increases, the upper limit and the spread will increase, while the lower limit r unchanged. The lower limit does not change because it is an exogenous variable set by management. As the variance increase, however, the amount of uncertainty increases. Whe happens, the target cash balance, and therefore the upper limit and the spread, will need to If the variance drops to zero, then the lower limit, the target balance, and the upper limit will the same.

spread will increase, while the lower limit remains ause it is an exogenous variable set by the amount of uncertainty increases. When this he upper limit and the spread, will need to be higher. the target balance, and the upper limit will al be

Chapter 19 - Appendix
Question 9 Input Area:

Variance of cash flows Opportunity cost Lower limit Order fixed cost

$ $ $

890,000 7% 160,000 300

Output Area:

Daily interest rate C* U* $ $

0.0185% 170,260.47 190,781.41

Chapter 19 - Appendix
Question 10 Input Area:

Target cash balance Toal cash for year Order cost

$ $ $

2,700 28,000 10

Output Area:

Interest rate

7.68%