Scribd
Upload
138 views4 pages

Average Daily Float

1. The average daily float for a firm receiving checks is $29,872. This represents the amount of money that is uncollected and unavailable to the firm on a daily basis. 2. Implementing a lockbox service could reduce the collection time for a firm receiving an average of $175,000 in daily collections by 3 days. This would provide a cash balance reduction of $525,000. 3. The maximum monthly charge the firm should pay for the lockbox service, assuming payments are made at the end of each month, is $1,718.71. This represents the outstanding cash balance reduction plus interest earned over the payment period.

Uploaded by

An Do
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
138 views4 pages

Average Daily Float

1. The average daily float for a firm receiving checks is $29,872. This represents the amount of money that is uncollected and unavailable to the firm on a daily basis. 2. Implementing a lockbox service could reduce the collection time for a firm receiving an average of $175,000 in daily collections by 3 days. This would provide a cash balance reduction of $525,000. 3. The maximum monthly charge the firm should pay for the lockbox service, assuming payments are made at the end of each month, is $1,718.71. This represents the outstanding cash balance reduction plus interest earned over the payment period.

Uploaded by

An Do
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

1.

Average daily float = (average amount of checks received x the number of delayed
days) : the number of days per month = 113,000 x 4 : 30 = 15066.6
2. Disbursement float = the average monthly written checks x the number of days to
clear the checks = 14,400 x 4 = 57,600
Collection float = The average monthly received checks x number of days to clear the
checks = -25300 x 2 = -50,600
Net float = disbursement float + collection float = 7000
The new collection float will be:

Collection float
= 1(–$29,000)
Collection float
= –$29,000

And the new net float will be:

Net float =
$68,000 –
29,000 Net
float =
$39,000

3.
Collection float = The average monthly received checks x number of days to clear the checks
= 13,800 x 3 = $41,400

a. They should pay no more than the amount of the float (100) to eliminate the float
b. Maximum daily charge = collection float x daily interest rate = 13,800 x 0.018% =
2.484
4.
a. Total float = amount of larger check received x the number of delayed days +
amount of smaller check received x the number of delayed days = 10,700 x 4 +
4,600 x 3 = 56,6000
b. Average daily float = total float : number of days per month = 56,600 : 30 =
1886.6
c. Average daily receipt = Average checks received : number of days per month =
(10,700 + 4,600) :30 = 510
Total amount of received checks = 10,700 + 4,600 = 15,300
Weighted av delay = number of days to clear a check x (the amount of received
check : total amount of received checks)
= 4 x (10,700/15300) + 3 x (4600/15300)=3.69 days
5. Average daily collections = number of received checks x value of a check = 125 x
5100 = 637,500
Present value of the lockbox service = the average daily receipts x number of days the
collection is reduced = 2 x 637,500 = 1,275,000
Because the daily cost is a perpetuity. So, The present value of the cost = the daily
cost : the daily interest rate.
PV of cost = 175 : 0.016% = 1093750
NPV = PV – PV of cost = 181,250
 The firm should take the lockbox
The annual savings excluding the cost would be the future value of the savings
minus the savings, so:
Annual saving = 1,275,000 x (1+ 0.016%)365 - 1,275,000 = 76670.8
the annual cost would be the future value of the daily cost, which is an annuity, so:
Annual cost = fee charged by the bank x (FVIFA365,.016%) = 175 x (FVIFA365,.016%) =
65771.6
Annual net saving = Annual saving – annual cost = 10899.2
6.
a. Process 5,300 checks per month.
% Check type Total amount
60 $47 3180
40 $79 2520

Average daily float = (average amount of checks received x the number of delayed
days) : the number of days per month = (3180 x 47 x 2 + 2520 x 79 x 3) : 30 = 29,872
On average, there is $29,872 that is uncollected and not available to the firm.

b. Total collection = 3180 x 47+2520 x 79 = 348,540


Weighted average delay = number of days to clear a check x (the amount of
received check : total amount of received checks) = 2 x (3180x$47:$348,540) + 3
x (2520 x $79 : $348,540) = 2.57 days
c. Average daily float = Weighted average delay x average checks received a day =
2.57 x 348,540 : 30 = 29,872
The most the firm should pay is the total amount of the average float, or $29,872
d. Interest rate = 7%/year
Daily interest rate = (1+7%)1/365 -1 = 0.0185%
Daily cost of the float = daily float x daily interest rate = $29,872 x 0.0185% = $5.53
e. New average daily float = average amount of checks received x the number of delayed
days) : the number of days per month = 1.5 x 348,540 :30 = $17,427
7. A. PV = the number of days collections are reduced x the average daily collections = 3 x 485
x 935 = 1,360,425
b. PV of cost = lockbox fee per transaction x number of transaction : interest rate = $0.15 x
485 : 0.068% = 106,985.3
NPV = PV – PV of cost = 1253439.7

Net cash flow per day = PV x interest rate - transaction cost per day = 852.339
Net cash flow per check = Net cash flow per day : number of payments = 1.76

8. a. Cash balane reduction = the number of days the system reduces collection time x the
average daily collections = 3 x 175,000 = 525,000
b. Average daily rate = (1+4%)1/365 – 1 = 0.01%
Daily dollar return = Cash balane reduction x Average daily rate = 52.5
c, If the company takes the lockbox, it will receive three payments early, with the first
payment occurring today.
Savings = $175,000 + $175,000(PVIFA.001%,2) = 524,974
Monthly i.rate = (1+4%)1/12 – 1 = 0.327%
Assuming the lockbox payments occur at the end of the month, the lockbox
payments are a perpetuity
PV = C/R => C = 1,605

a)
Outstanding cash balance reduction = Average daily collections * Number of days
= $175,000 * 3
= $525,000.

b)
Daily dollar return = Outstanding cash balance reduction * ((1 + rate of return)^(1/365)-1)
= $525,000 * ((1 + 4%)^(1/365)-1)
= $525,000 * 0.00010746
= $56.42
c-1) Assuming the lockbox payments occur at the end of the month
Payment = PV * Effective monthly rate
= $525,000 * ((1 + 4%)^(1/12) -1)
= $525,000 * 0.00327373978
= $1,718.71

Maximum monthly charge = $1,718.71

c-2) assumed that the lockbox payments occur at the beginning of the month

Maximum monthly charge = $1,718.71 / (1 + 0.00327373978)


= $1,713.11

9. The interest that the company could earn will be the amount of the checks times the
number of days it will delay payment times the number of weeks that checks will be
disbursed times the daily interest rate
Interest = 107 x 7 x (52:2) x 0.009% = 114.002
10. The benefit of the new arrangement is the $4.5 million in accelerated collections since
the new system will speed up collections by one day. The cost is the new
compensating balance, but the company will recover the existing compensating
balance, so:

NPV = $4,500,000 − ($390,000 − 340,000)=4,450,000


Net savings = NPV x the annual interest rate = 4,450,000 x 2.5% = 11125
11. PV = reduction in collection time x the average daily collections =

You might also like