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Chapter 3: Q1BP_b (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鈥檚 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.

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?

Short Answer

Expert verified

The company has earned $1,560,000 from short-term investments.

Step by step solution

01

Benefits of investing extra cash in short-term investments

It is beneficial to invest extra cash in short-term investments as the investor will be able to earn income in form of interest, and the liquidity of the organization will also not get affected.

02

Money freed up by the cash management system.

The interest earned on short-term investments is $1,560,000.

Interestonshort-terminvestment=Freedupfunds脳Interestrate=$13,000,000脳12%=$1,560,000

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Most popular questions from this chapter

Orbital Communications has operating plants in over 100 countries. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 150,000 kronas in Norway worth \(40,000. The funds drew 13 percent interest, and the krona increased 6 percent against the dollar. What is the value of the holdings, based on U.S. dollars, at year-end?

(Hint: Multiply \)40,000 times 1.13 and then multiply the resulting value by 106 percent.)

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand portion of Table 6-6.

1-year T bill at the beginning of year 1

5%

1-year T bill at the beginning of year 2

8%

1-year T bill at the beginning of year 3

7%

1-year T bill at the beginning of year 4

10%

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.

c. If the total cost of the new system is $400,000, should it be implemented?

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in Table 6-6.

1-year T bill at the beginning of year 1

6%

1-year T bill at the beginning of year 2

7%

1-year T bill at the beginning of year 3

9%

1-year T bill at the beginning of year 4

11%

In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?
See all solutions

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