8. As of the beginning of the quarter, you have a cash balance of $250. During the quarter, you

pay your suppliers $310. Your accounts receivable collections are $420. You also pay an interest payment of $30 and a tax bill of $180. In addition, you borrow $75. What is your cash balance at the end of the quarter?

A. $225

B. $245

C. $255

D. $275

E. $285


Solution: Computation of the Cash balance



Cash balance $        250

Add: Cash collections $        420

Total Receipts $        670

Less: Payments

Paid Supplies $        310

Interest paid $          30

tax paid $        180

Cash net changes $        150

Add; Borrowings $          75

Cash Balance at the end $        225



Hence the Cash balance is $225


9. Your firm has an average receipt size of $108. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 8,500 checks per day. The daily interest is .016 percent. If the bank charges a fee of $225 per day, should the lockbox project be accepted? What would be the net annual savings be if the service were adopted?

A. $25,842.59

B. $18,200.21

C. $19,250.45

D. $24,915.15

E. $24,519.51


a. The average daily collections are the number of checks received times the average value of a check, so:


Average daily collections = 108(8,500)

Average daily collections = 918,000


The present value of the lockbox service is the average daily receipts times the number of days the collection is reduced, so:


PV = (2 day reduction)(918,000)

PV = 1,836,000


The daily cost is a perpetuity. The present value of the cost is the daily cost divided by the daily interest rate. So:

PV of cost = 225/0.00016

PV of cost = 1,406,250


The NPV of lockbox is 1,836,000-1,406,250 = 429,750


The firm should take the lockbox service.


The net annual savings excluding the cost would be the future value of the savings minus the savings, so:

Annual savings = 1,836,000(1.00016) ^ 365 – 1,836,000

Annual savings = 110,406


And the annual cost would be the future value of the daily cost, which is an annuity, so:

Annual cost = 225(FVIFA365,.016%)

Annual cost = $84,576.99

So, the annual net savings would be:

Annual net savings = 110,406- $84,576.99

Annual net savings = $25,829 Approx

10. No More Pencils, Inc., disburses checks every two weeks that average $93,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays .015 percent per day for those seven days? Ignore the effects of compounding interest.

A. $3,315.25

B. $2,958.58

C. $2,538.90

D. $2,852.12

E. $2,583.09



0.015% can be written as .00015. Therefore, .00015*7*93000*26 shows the interest rate over 7 days times the principal times the number of times this can happen annually. This comes to: $2538.90


11. Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $20,000 plus 10 percent per transaction. The estimated reduction in collection and processing time is one day. If the average customer payment in this region is $5,300, how many customers are needed, on average, each day to make the system profitable for Cow Chips? Treasury bills are currently yielding 5 percent per year.

A. 87.87

B. 91.15

C. 83.25

D. 81.98




NPV =0 =(5300*1*n)-(0.10*n)/0.000134-20000/0.05


N = 87.87



12. If 25% of the customers pay on day 10 and 75% pay on day 30, the average collection period is:

A. 15 days.

B. 20 days.

C. 25 days.

D. 30 days.

E. 40 days.


Solution: Average collection period assuming no of customers are 10 = 2.5*10+7.5*30

=25+225 = 250/10 = 25 Days


13. Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $200. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $7 on each of the 1,000 customers. The opportunity cost is 1.5% for the credit period. Should they pursue the credit check?

A. No, because the $7000 cost is too high.

B. No, because a $200 loss is minor.

C. Yes, because the net gain is $30,000.

D. Yes, because the net gain is $23,000.

E. Yes, because the net gain is $193,000.



Expected loss from non-payment = 1000*15%*200 = $30000


Cost of Credit Check = 1000*7 = $7000


Opportunity cost = $7000*1.5% =$105


Hence Net Gain = 30000 -7000 -105 = $22895



14. If 20% of the customers pay on day 10 and 80% pay on day 30, the average collection period is:

A. 10 days.

B. 15 days.

C. 22.5 days.

D. 24 days.

E. 26 days.

Solution: Average collection period assuming no of customers are 10 = 2*10+8*30

=20+240 = 260/10 = 26 Days



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