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Part 1

Float Simon

Corporation has daily cash receipts of

$65,000.

A recent analysis of its collections indicated that customers' payments were in the mail an average of

4.0

days. Once received, the payments are processed in

2.0

days. After payments are deposited, it takes an average of

2.5

days for these receipts to clear the banking system.

a.How much collection float (in days) does the firm currently have?

b.If the firm's opportunity cost of capital is

10%,

would it be economically advisable for the firm to pay an annual fee of

$16,000

to reduce collection float by

2

days? Explain why or why not.

c.What would the company's opportunity cost have to be to make the

$16,000

fee worthwhile?