Solve The Following Problem: Normas Cat Food Of Shell Knob S
Solve The Following Problem Normas Cat Food Of Shell Knob Ships Cat
Norma’s Cat Food of Shell Knob ships cat food throughout the country. Norma has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two and one-half 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 Iowa.
If the company has $5 million per day in collections and $3 million per day in disbursements, how many dollars will the cash management system free up? Justify your answers. If the company can earn 8 percent per annum on freed-up funds, how much will the income be? Justify your answers. If the annual cost of the new system is $800,000, should it be implemented? Explain why or why not.
Paper For Above instruction
The implementation of an improved cash management system has the potential to significantly enhance the company's liquidity position by reducing the amount of capital tied up in operational cycles. In the case of Norma’s Cat Food of Shell Knob, the strategic measures—speeding up collections and delaying disbursements—directly impact the net cash flow and, consequently, the funds available for investment or other uses.
Answer A: Cash Management System Will Free Up Funds and Justification
To determine the amount of funds freed up by the new cash management system, we first analyze the two key improvements:
- Speeding up collections by 2.5 days.
- Postponing disbursements by 0.5 days.
The company's daily collections amount to $5 million. By accelerating the collection process by 2.5 days, the company effectively gains the equivalent of 2.5 days' worth of collections:
$5 million/day × 2.5 days = $12.5 million
Similarly, the company's daily disbursements are $3 million. By delaying disbursements by 0.5 days, the company postpones payments equivalent to:
$3 million/day × 0.5 days = $1.5 million
The net funds freed up by the management system are therefore:
$12.5 million (collections acceleration) - $1.5 million (disbursement delay) = $11 million
This calculation indicates that the cash management system would free up approximately $11 million in funds at any given time.
Answer B: Income Generated on Freed-up Funds and Justification
The freed-up funds, estimated at $11 million, can be invested to earn interest, enhancing the company's financial efficiency. Assuming an annual interest rate of 8%, the annual income generated from these funds can be calculated as:
$11 million × 8% = $880,000
This figure denotes the additional income the company can earn annually, solely from the improved cash flow management. The 8% rate reflects the company's opportunity cost and risk-adjusted return on short-term investments.
Answer C: Should the System be Implemented? Justification
The decision to implement the new cash management system hinges on a cost-benefit analysis. The annual cost of the system is projected at $800,000. Comparing this to the potential savings and income:
- Additional income from freed-up funds: $880,000
- System cost: $800,000
Since the income generated exceeds the cost of the system by:
$880,000 - $800,000 = $80,000
the system appears financially advantageous. Implementing the system would not only generate a net benefit of $80,000 annually but also improve liquidity and operational flexibility.
Furthermore, the strategic value of faster cash collection and delayed disbursement can lead to better working capital management, reduced borrowing needs, and increased investment opportunities, all of which reinforce the case for implementation.
Conclusion
Based on the analysis, the cash management system would free up approximately $11 million, yielding an annual interest income of $880,000 at an 8% rate. Given that the system's annual cost is $800,000, the net benefit of $80,000, coupled with the operational advantages, justifies its adoption. Therefore, Norma's Cat Food should proceed with implementing the new cash management system to optimize cash flows and enhance overall financial performance.
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