City Farm Insurance has collection centers across the country to speed up collec
ID: 2712084 • Letter: C
Question
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 three and one-half days and disbursement time increased by two days because of these policies. Excess funds are being invested in short-term instruments yielding 4 percent per annum.
If City Farm has $4.50 million per day in collections and $3.50 million per day in disbursements, how many dollars has the cash management system freed up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)
How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? (Enter your answer in dollars not in millions (e.g., $1,234,567).)
a.
If City Farm has $4.50 million per day in collections and $3.50 million per day in disbursements, how many dollars has the cash management system freed up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)
Explanation / Answer
Cash freed up from collection = Amount of daily collection x Reduction in collection period
= 4,500,000 x 3.5 days
= 15,750,000
Cash freed up from Disbursement = Amount of daily disbursement x increase in disbursement period
= 3,500,000 x 2 days
= 7,000,000
Total cash freed up = 15,750,000 + 7,000,000
= 22,750,000
b)
Interest rate = 4% per annum
Interest income =amount freed up x Interest rate
= 22,750,000 x 4%
=910,000