Please answer fully! Hardin-Gehr Corporation (HGC) began operations 5 years ago
ID: 2713776 • Letter: P
Question
Please answer fully!
Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit; and it keeps its central billing system there. On average, it takes 5 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 2 days-bringing it down to 3 days. HGC receives an average of $2,200,000 in payments per day.
a) How much free cash would HGC generate if it implemented the lockbox system? Round your answer to the nearest cent.
b) Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow?
c) How would growth affect your answer?
If the firm grows, cash flow 1) would be a one-time cash flow, 2) would increase by the differential growth, 3) would decrease by the differential growth
d) If HGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis? Round your answer to the nearest cent.
e) What is the maximum monthly charge HGC should pay for the lockbox system? Round your answer to the nearest cent.
Explanation / Answer
Answer:
Number of days saved = 2 days
HGC receives payments per day = $2,200,000
Therefore,
Free cash flow = $2,200,000 x 2 = $4,400,000
b) Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow?
Answer:
This would be a recurring one.
c) How would growth affect your answer?
If the firm grows, cash flow
1) would be a one-time cash flow,
2) would increase by the differential growth,
3) would decrease by the differential growth
Answer:
Cash flow will also increase by the growth rate
d) If HGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis? Round your answer to the nearest cent.
Answer:
Opportunity cost of capital = 10%
Money made by lock box = 10% of $4,400,000 = $440,000
e) What is the maximum monthly charge HGC should pay for the lockbox system? Round your answer to the nearest cent.
Answer:
Maximum monthly charge would be the opportunity cost of capital.
Opportunity cost of capital = 10%
Money made by lock box = 10% of $4,400,000 = $440,000