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A firm has daily cash receipts of $200,000. A commercial bank has offered to reduce the collection time by 3 days. The bank requires a monthly fee of $4,000 for providing this service. If money market rates will average 12% during the year, the additional annual income (loss) of having the service is
Suggested Answer: D
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The estimated incremental after-tax operating cash flows for each year of a capital project consist of two components: the after-tax cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment. The first of these for Pauley can be calculated as follows:
Pauley's total after-tax operating cash inflow for each year of the project's life is thus $36,000 ($30,000 + $6,000). Ii the final year of the project, two additional cash flows must be taken into account, the after-tax proceeds from the disposal of the equipment purchased for the project, and the recovery of working capital devoted to the project. These two additional cash flows can be calculated as follows:
Pauley's total after-tax cash inflow for the final year of the project's life is thus $49,000
($36,000 + $13,000).
36 comments · newest first
FI
Filiberto
11 months ago
Definitely $24,000 loss, no doubt!
RU
Ruby
11 months ago
Wait, how does reducing collection time help?
JE
Jerry
11 months ago
I think it’s a loss, right?
PA
Paulene
11 months ago
That $4,000 fee adds up fast!
SH
Sherrell
12 months ago
Daily cash receipts are $200,000.
YE
Yen
12 months ago
I feel like the key here is to calculate the total interest from the cash receipts first, then see if the fee outweighs that. I just hope I remember the formulas correctly!
DE
Deeann
12 months ago
I practiced a question like this where we had to determine the net benefit of a service. I think we need to compare the interest earned from the earlier cash with the cost of the service.
BA
Basilia
1 year ago
I'm a bit unsure about how to factor in the monthly fee. Does that get subtracted from the total income we calculate from the earlier cash receipts?
DE
Devorah
1 year ago
I remember calculating the opportunity cost of cash flows in a similar question. I think we need to find the interest saved from reducing the collection time.
CR
Cristy
1 year ago
The domain expert is the one with special knowledge who defines what's fit for purpose, so I'm going with option D.
DE
Deandrea
1 year ago
Hmm, I'm a bit unsure about this one. The options seem quite specific, so I'll need to carefully consider the differences between them. A benefits realization review, a customer service review workshop, a service catalogue gap analysis, or a stakeholder review analysis - I'll have to think through the pros and cons of each approach.
NI
Nichelle
1 year ago
The wording of the question and definition seems straightforward, but I want to make sure I'm not missing any nuance. I'll take my time and really think through each answer choice to select the best match.
MI
Ming
1 year ago
This exam is making me thirsty. Anyone want to grab a coffee and discuss the merits of each answer option?
TE
Tennie
1 year ago
Let's calculate it together over coffee and figure out the correct answer.
MA
Magda
1 year ago
Hmm, I see your point. But I think it's actually D) $68,000.
SH
Shizue
1 year ago
I disagree, I believe the correct answer is C) $66,240.
RE
Reena
1 year ago
Sure, I'll join you for coffee. I think the answer is A) $(24,000).
DO
Dottie
1 year ago
Wait, is this a trick question? What if the cash receipts are actually Monopoly money? In that case, the answer is a free night at the Ritz-Carlton.
LE
Lemuel
1 year ago
Oh, I know this one! It's option D, $68,000. The bank's offer to reduce the collection time by 3 days is definitely worth the $4,000 monthly fee.
JA
Jacki
1 year ago
I don't know, the $4,000 monthly fee seems a bit steep. I'm thinking option A, $(24,000), might be the right answer here.
QU
Queenie
1 year ago
Yeah, I also believe option A is the correct answer in this scenario.
LA
Lashunda
1 year ago
I think option A, $(24,000), makes the most sense financially.
JA
Janet
1 year ago
I agree, that monthly fee is quite high.
BU
Buddy
1 year ago
Hmm, this is a tricky one. I'm leaning towards option C, $66,240. The reduced collection time should result in more cash available for investment at the 12% money market rate.
AN
Anabel
1 year ago
I'm not sure about this one, but option D, $68,000, seems like a possibility. It's a tough decision to make.
CO
Corrina
1 year ago
Yeah, option C sounds like the best option. It's all about maximizing the return on the cash receipts by investing it at the higher money market rate.
AU
Audra
1 year ago
I disagree, I believe option C, $66,240, is the right choice. The increased investment opportunity at 12% will outweigh the monthly fee.
VI
Vincenza
1 year ago
I agree, option C seems like the most logical choice. The additional income from investing the extra cash at 12% would likely outweigh the $4,000 monthly fee.
KE
Kerry
1 year ago
I think option C, $66,240, makes sense. The reduced collection time could lead to more money being invested at the 12% rate.
SO
Sommer
1 year ago
I think option A, $(24,000), is the correct answer. The monthly fee of $4,000 will eat into the additional income.
ST
Stevie
1 year ago
I'm not sure, but I think the answer might be C) $66,240. Can someone explain their rationale?
JO
Johnetta
1 year ago
I agree with Florencia, because the additional annual income can be calculated by subtracting the monthly fee from the interest earned on the reduced collection time.
FL
Florencia
1 year ago
I think the answer is B) $24,000.
CR
Crissy
1 year ago
I agree with Silvana, the rationale is that the additional annual income would be the difference between the interest earned on the $200,000 for 3 days at 12% and the monthly fee of $4,000.
SI
Silvana
2 years ago
I disagree, I believe the answer is B) $24,000.
AL
Alease
2 years ago
I think the answer is A) $(24,000).