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    Working Capital and Current Assets Management

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    I am having a hard time with this problem and can't seem to figure it out. Please help.

    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 2.5 days. Once received, the payments are processed in 1.5 days. After payments are deposited, it takes an average of 3 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 is 11%, would it be economically advisable for the firm to pay an annual fee of $16,500 to reduce collection float by 3 days? Explain why or why not.

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    Solution Preview

    a. How much collection float (in days) does the firm currently have?
    Currently firm is having following float:
    = Duration of Mail + Processing + ...

    Solution Summary

    Solution solves problem related to collection floats.