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Average daily cash outflows are $3 million for Evans Inc. A new cash management system can add two days to the disbursement schedule. Assuming Evans earns 10 percent on excess funds, how much should the firm be willing to pay per year for this cash management system?
Suggested Answer: B
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Choice 'b' is correct. Whenever accounts receivable (AR) are decreasing when sales are increasing (and the decrease in AR is not due to an increase in bad debt write offs), this would indicate that the average collection period for AR has decreased.
Choices 'a', 'c', and 'd' are incorrect. There is insufficient information in the question to draw conclusions about these items.
33 comments · newest first
KA
Karrie
10 months ago
I calculated it too, but I got $600,000.
CA
Carmen
11 months ago
Wait, can a system really save that much?
NI
Nieves
11 months ago
That sounds about right, I agree!
BR
Brande
11 months ago
I think the answer is $1,500,000.
AN
Antonio
11 months ago
The cash outflow is $3 million daily.
AR
Arlean
12 months ago
I feel like the answer might be around $600,000, but I’m not completely confident. I just hope I remember the calculations correctly!
TU
Tula
12 months ago
I think we practiced something similar where we had to calculate the annual benefit from a cash management system. If I recall correctly, it was about maximizing the cash on hand.
SA
Samira
12 months ago
I’m a bit unsure about the exact formula we used for this type of question. Was it just the cash outflow multiplied by the interest rate and the number of days?
CH
Cherelle
1 year ago
I remember we calculated the opportunity cost of delaying cash outflows in class. I think we need to find the interest earned on the cash for those extra days.
MA
Maryrose
1 year ago
This seems straightforward enough. I just need to make sure I understand the information provided and apply the right formulas.
JU
Junita
1 year ago
I've seen similar problems before, so I think I can handle this. The key is to focus on the time value of money and the interest earned on the excess funds.
NI
Nicolette
1 year ago
Hmm, I'm a bit unsure about this one. I'll need to think through the calculations carefully to make sure I don't miss anything.
EM
Emmanuel
1 year ago
Okay, this looks like a cash management problem. I'll need to figure out the impact of the two-day change in the disbursement schedule and then calculate the potential savings.
JO
Jordan
1 year ago
Ooh, this one's a real cash cow! I'm thinking C) $600,000 is the way to go. That's a pretty sweet deal if you ask me.
ZE
Zena
1 year ago
Yeah, it's a smart move to improve cash flow and earn more on excess funds.
BI
Billye
1 year ago
I think so too. It would definitely be worth it in the long run.
CA
Carole
1 year ago
I agree, C) $600,000 seems like a reasonable investment for the cash management system.
MI
Mike
1 year ago
Haha, I bet the guys at Evans are feeling like a million bucks with this new cash management system! I'm gonna go with A) $3,000,000 just to be safe.
OL
Olive
1 year ago
Definitely, it's better to be safe with that amount.
RA
Raymon
1 year ago
Yeah, that seems like the safest bet.
RY
Ryann
1 year ago
I think A) $3,000,000 sounds like a good choice.
MA
Malcolm
1 year ago
I'm not sure. I think the answer might be A) $3,000,000. Can someone explain the rationale behind choosing C) $600,000?
VA
Valene
1 year ago
I'm pretty sure the answer is D) $150,000. I mean, who wouldn't want to save $150,000 per year? That's a steal!
KA
Katlyn
1 year ago
User 2: Yeah, saving $150,000 per year sounds like a good deal.
CL
Clarinda
1 year ago
User 1: I think the answer is D) $150,000.
CH
Chantay
1 year ago
Wow, this is a tricky one. I'm going to go with B) $1,500,000 since that seems like a reasonable amount for a new cash management system.
ST
Stephanie
2 years ago
I agree with Dylan. The firm should be willing to pay $600,000 for the cash management system because it can earn 10 percent on excess funds.
FR
Frederica
2 years ago
Hmm, I think the correct answer is C) $600,000. Adding two days to the disbursement schedule would save Evans $3 million x 2 days = $6 million per year, and with a 10% return, that's $600,000 in savings.
WI
Willodean
1 year ago
It's a smart investment for the company to make.
KI
Kirk
1 year ago
So, Evans should be willing to pay $600,000 per year for the cash management system.
LY
Lyndia
1 year ago
That makes sense, $6 million in savings with a 10% return is $600,000.
HU
Huey
1 year ago
I agree, the correct answer is C) $600,000.
DY
Dylan
2 years ago
I think the answer is C) $600,000.