City Farm Insurance has collection centers across the country to speed up
collections. The company also makes its disbursements from remote
disbursement centers so checks written by City Farm 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.
a. If City Farm has $5 million per day in collections and $3 million per day in
disbursements, how many dollars has the cash management system freed up?
b. How much can City Farm earn in dollars per year on short-term
investments made possible by the freed-up cash?
a. The collection time has been reduced by 2 days. The daily collection is $5 million. The collection freed up is 5X2=$10 ...
The solution explains the savings that are made by City Farm Insurance by using a cash management system