Answers to Chapter 16 Current Asset Management 16.

1 The checks that Park Place writes create disbursement float, which is good float. The clinic has $1,000 x 4 da s ! $4,000 in disbursement float. The checks that the clinic recei"es create collections float, which is bad float. The clinic has $1,000 x # da s ! $#,000 in collections float. The clinics net float is $1,000$ %et float ! &isbursement 'good( float ) *ollections 'bad( float ! $4,000 ) $#,000 ! $1,000. +n essence, the balance on the firm,s books is $1,000 less than the balance shown on the bank,s books. 16.2 a. The annual cost of o-erating the lockbox s stem is $10#,#.0$ Total cost ! '/ixed cost -er month x 10( 1 '%umber of locations x %umber of transfers x *ost -er transfer( ! '$2,.00 x 10( 1 '10 x 020 x $3.4.( ! $45,000 1 $0.,#.0 ! $10#,#.0. b. The annual benefit is $34,.00$ 6enefit ! %umber of da s sa"ed x Pa ments -er da x *arr ing cost ! # x $#0.,000 x 0.10 ! $34,.00. c. +n this situation, the annual cost of the lockbox s stem is greater than the annual benefit, and hence the lockbox s stem should not be initiated. 16.3 a. 7eattle must -a the bills in 00 da s if it wants to take ad"antage of the discount of three -ercent. +f it wants to take the costl trade credit 'forego the discount(, it must -a the bills in 20 da s. b. 8sing the a--roximate cost formula, the cost is 04.59.
&iscount -ercent #20 :--roximate 9 cost ! ;;;;;;;;;;;;;; ! ;;;;;;;;;;;;;;;;;;;;;; 100 < &iscount -ercent &a s credit recei"ed < &iscount -eriod # #20 ! ;; ! ;;; ! 0.045 ! 04.59. 34 40

%ote that the -eriodic cost rate is # = 34 ! 0.0#03 ! #.039 and the number of discount -eriods -er ear is #20 = 40 ! 3. >ith this information, the effecti"e annual cost rate '?:@( is found as follows$ ?:@ ! '1 1 Periodic rate(%umber of -eriods -er
ear

) 1.0

! '1.0#03(3 ) 1.0 ! 1.#1. ) 1.0 ! 0.#1. ! #1..9. The cost is higher when intra< ear com-ounding is considered.

16.4 a. Aangle bu s $400,000 'gross( in medical su--lies a ear from *onsolidated. The net -urchases 'the true cost of the su--lies( is onl 0.34. x $400,000 ! $#30,000 because the can be bought at a 0.. -ercent discount when -a ment is made within 10 da s. Bn a dail basis, Aangle -urchases $#30,000 = #20 ! $1,05#.##. +f Aangle takes the free credit and -a s on &a 10, its -a ables from *onsolidated would total 10 x $1,05#.## ! $10,5##.##, which is the amount of free credit. b. +f Aangle -a s after 4. da s, its accounts -a able will increase to 4. x $1,05#.## ! $45,4.0. Thus, the amount of costl trade credit is Total trade credit ) /ree trade credit ! $45,4.0 ) $10,5##.## ! $#4,312.24. c. Aangle is foregoing a 0.. -ercent discount on its $400,000 of -urchases, so the dollar cost of the additional 'costl ( trade credit is 0.00. x $400,000 ! $10,000. &i"iding this dollar cost b the amount of additional credit -ro"ides the a--roximate -ercentage cost of the costl trade credit$ $10,000 :--roximate -ercentage cost ! ;;;;;;;; ! 0.024 ! 02.49. $#4,312.24 Bf course, the a--roximate cost could ha"e been found b a--l ing the following formula$
&iscount -ercent #20 :--roximate 9 cost ! ;;;;;;;;;;;;;; ! ;;;;;;;;;;;;;;;;;;;;;;;; 100 < &iscount -ercent &a s credit recei"ed < &iscount -eriod 0.. #20 ! ;;; ! ;;; ! 0.024 ! 02.49. 34.. #.

d. +f Aangle can obtain a bank loan for less than 02.4 -ercent cost, including interest cost and fees, it should re-lace the costl credit '$#4,312.24( with a bank loan. e. :s indicated in Part d, onl the costl trade credit should be re-laced. Aangle should alwa s take the $10,0##.## of free trade credit. 16.5 a. The firm,s a"erage collection -eriod ':*P( is 04 da s$ :*P ! '0.#0 x 10 da s( 1 '0.40 x #0 da s( 1 '0.#0 x 40 da s( ! 04 da s. b. >ith $1,000,000 in sales, the firm,s a"erage dail sales ':&7( are $1,000,000 = #20 ! $#,###.##. Then, @ecei"ables balance ! :&7 x :*P ! $#,###.## x 04 ! $30,000.

c. This change would reduce the :*P to 04 da s$ :*P ! '0.#0 x 10 da s( 1 '0.40 x #0 da s( ! 04 da s. Then, @ecei"ables balance ! :&7 x :*P ! $#,###.## x 04 ! $50,000. Thus, the toughened collections -olic reduces the recei"ables balance b $10,000. d. >ith a reduction in recei"ables of $10,000, the carr ing cost sa"ings is 0.05 x $10,000 ! $500. :lternati"el , the old carr ing costs are 0.05 x $30,000 ! $4,000, while the new carr ing costs are 0.05 x $50,000 ! $2,400, for a sa"ings of $500. 16.6 a. /argo,s :*P is 22 da s$ :*P ! '0.10 x #0 da s( 1 '0.20 x 20 da s( 1 '0.#0 x 30 da s( ! 22 da s. b. >ith $14,400,000 in net -atient ser"ice re"enues, the firm,s a"erage dail sales ':&7( are $14,400,000 = #20 ! $40,000. Then, @ecei"ables balance ! :&7 x :*P ! $40,000 x 22 ! $0,240,000. c. This new electronic claims s stem would reduce the :*P to .0.. da s$ :*P ! '0.10 x #0 da s( 1 '0.20 x 4. da s( 1 '0.#0 x 4. da s( ! .0.. da s. Then, @ecei"ables balance ! :&7 x :*P ! $40,000 x .0.. ! $0,100,000. The new claims s stem reduces the recei"ables balance b $.40,000. d. >ith a reduction in recei"ables of $.40,000, the carr ing cost sa"ings is 0.10 x $.40,000 ! $.4,000. :t the same time, /argo would add $#0,000 in claims s stem costs. Thus, the net benefit of the s stem is a -ositi"e $04,000, which indicates that the new s stem should be ado-ted. %ote that the actual carr ing cost sa"ings is somewhat less than $.4,000, because some -ortion of the $.40,000 reduction in recei"ables is actuall -rofit that would flow to retained earnings rather than to the recei"ables account.