Concept explainers
Float and Weighted Average Delay [LO1] Your neighbor goes to the post office once a month and picks up two checks, one for $13,000 and one for $4,500. The larger check takes four days to clear after it is deposited; the smaller one takes three days. Assume 30 days in a month.
a. What is the total float for the month?
b. What is the average daily float?
c. What are the average daily receipts and weighted average delay?
a)
To calculate: The overall float for a month.
Introduction:
The float is the difference between the bank cash and the book cash denoting the net effects of checks during the clearing process.
Answer to Problem 4QP
The total float is $65,500.
Explanation of Solution
Given information:
Once in a month, Person X’s neighbor collects two checks; one check for $13,000 and another check for $4,500. The clearing days of the check after it is deposited is 4 days, and 3 days for the larger check and smaller check respectively.
Formula to calculate the overall float:
Calculate the collection float:
Hence, the total float is $65,500.
b)
To calculate: The average float daily.
Introduction:
The float is the difference between the bank cash and the book cash denoting the net effects of checks during the clearing process.
Answer to Problem 4QP
The average daily float is $2,183.33.
Explanation of Solution
Given information:
Once in a month, Person X’s neighbor collects two checks; one check for $13,000 and another check for $4,500. The clearing days of the check after it is deposited is 4 days, and 3 days for the larger check and smaller check respectively.
Formula to calculate the average daily float:
Calculate the average daily float:
Hence, the average daily float is $2,183.33.
c)
To calculate: The average daily receipts and weighted average delay.
Introduction:
The float is the difference between the bank cash and the book cash denoting the net effects of checks during the clearing process.
Answer to Problem 4QP
The average daily receipts is $583.33 and the weighted average delay is 3.74 days.
Explanation of Solution
Given information:
Once in a month, Person X’s neighbor collects two checks; one check for $13,000 and another check for $4,500. The clearing days of the check after it is deposited is 4 days, and 3 days for the larger check and smaller check respectively.
Formula to compute the average daily charge:
Compute the average daily charge:
Hence, the average daily charge is $583.33.
Formula to compute the weighted average delay:
Compute the weighted average delay:
Hence, the weighted average delay is 3.74 days.
Want to see more full solutions like this?
Chapter 19 Solutions
Fundamentals of Corporate Finance
- 10. Comparing Costs of Checking Accounts. What would be the net annual cost of the following checking accounts? a. Monthly fee, $3.75; processing fee, $0.25 per check; checks written, an average of 22 a month. b. Interest earnings of 6 percent with a $500 minimum balance; average monthly balance, $600; monthly service charge of $15 for falling below the minimum balance, which occurs three times a year (no interest earned in these months). ype here to search 144 10 近arrow_forward2. Your firm processes 50,000 checks each year with an average face value of $50 per check. Collecting on these checks takes 2 days of mail float, 3 days of processing float, and 1 day of availability float. At an opportunity cost rate of 4%, what is the opportunity cost of collection float? What would the opportunity cost of collection float be in you achieved check collection efficiencies that lowered mail float to 1 day, processing float to 2 days, and availability float to 0 days?arrow_forward4. Suppose you earn and spend $2,400 per month. You receive your paycheck on the first day of the month and must decide how much of it to hold as cash or in a non- interest-earning checking account and how much to deposit in your savings account. The savings account pays 5 percent interest; however, the bank charges you $2 for each withdrawal you make during the month. a. What will be your average demand for money over the month? b. If the interest rate rose to 10 percent, what would be your average demand for money over the month? Is this change consistent with your expectations about the demand for money?arrow_forward
- (D) Receivables and Cash: Collection Float A firm has daily cash receipts through checks. On average 150 checks are received per day while each check has an average value of P2,500. It takes an average of 3 days for the bank to clear the checks. A bank has offered to decrease the clearing period to one day for a monthly fee of P500. The bank gives an interest rate of 3% per year. Required: 16. How much is the daily cash receipts? 1. How much is the decrease of the clearing float in days? 2. How much would the average cash in bank balance increase by if the ABC took the bank's offer? 3. How much would ABC receive as total annual interest on the freed cash? 4. How much is the annual cost of the service? 21. What is the annual net benefit or loss) from having this service?arrow_forwardA firm has daily cash receipts through checks. On average 150 checks are received per day while each check has an average value of P2,500. It takes an average of 3 days for the bank to clear the checks. A bank has offered to decrease the clearing period to one day for a monthly fee of P500. The bank gives an interest rate of 3% per year. Required: 16. How much is the daily cash receipts? 17. How much is the decrease of the clearing float in days? 18. How much would the average cash in bank balance increase by if the ABC took the bank's offer? 19. How much would ABC receive as total annual interest on the freed cash? 20. How much is the annual cost of the service? 21. What is the annual net benefit or (loss) from having this service?arrow_forwardZimmer Inc. typically receives 850 checks everyday and the average size of check is $700. The company is now considering using a lockbox system. The lockbox system costs with $0.20 per check. It can reduce the collection time by three (3) days. What is the NPV of the new lockbox system? Assuming the daily interest rate is 0.035%. Ⓒ$109,286 $1,784,830 $1.299.286arrow_forward
- Pls solve it quickly !! 2. Your firm processes 50,000 checks each year with an average face value of $50 per check. Collecting on these checks takes 2 days of mail float, 3 days of processing float, and 1 day of availability float. At an opportunity cost rate of 4%, what is the opportunity cost of collection float? What would the opportunity cost of collection float be in you achieved check collection efficiencies that lowered mail float to 1 day, processing float to 2 days, and availability float to 0 days?arrow_forwardProblem 1 Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by two days. Based on the following information, should the lockbox system be adopted? Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Annual interest rate on money market securities 400 $1,200 $.35 6.0% How would your answer change if there were a fixed charge of $6,000 per year in addition to the variable charge?arrow_forwardYou are considering implementing a lockbox system for your firm. The system is expected to reduce the average collection time by 3 days. On an average day, your firm receives 430 checks with an average value of $91 each. The daily interest rate on Treasury bills is 0.015 percent. What is the anticipated amount of the daily savings if this system is implemented?arrow_forward
- Marcus is trying to decide which checking account to open. Bank A's account pays 1.6%, compounded annually. Bank Q's account pays 0.4% compounded quarterly. Which account will produce the highest return? Question 14 options: Bank A Bank Q They are the Samearrow_forward4. ABC Co. has received proposals from several banks to establish a lockbox system to speed up receipts. The firm receives an average of 700 checks per day averaging P1, 800 each and its cost of short term funds is 7% per year. If all proposals will produce equivalent processing results, which bank proposed charges is best 2 be adopted? A. A fee of .03% of the amount collected B. P.50 fee per check C. a compensating balance of P1, 750, 000 D. a flat fee of P125, 000 a yeararrow_forwardWhich do you prefer: a bank account that pays 10% per year (EAR) for 3 years or a. An account that pays 5.0% every 6 months for 3 years? b. An account that pays 15.0% every 18 months for 3 years? c. An account that pays 1.0% per month for 3 years? a. An account that pays 5.0% every 6 months for 3 years? If you deposit $1 into a bank account that pays 10% per year for 3 years, the amount you will receive after 3 years is $ If you deposit $1 into a bank account that pays 5.0% every 6 months for 3 years, the amount you will receive after 3 years is $ (Select from the drop-down menu.) (Round to five decimal places.) Therefore, you will prefer b. An account that pays 15.0% every 18 months for 3 years? If you deposit $1 into a bank account that pays 15.0% every 18 months for 3 years, the amount you will receive after 3 years is $ Therefore, you will prefer (Select from the drop-down menu.) c. An account that pays 1.0% per month for 3 years? If you deposit $1 into a bank account that pays…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education