Chapter 9: Cash and Marketable Securities Management © Pearson Education Limited 2005
Reducing and controlling costs is a reason often cited for
outsourcing a cash management process. Other popular reasons for
outsourcing include improving company focus and gaining access to
world-class capabilities.
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SOLUTIONS TO PROBLEMS
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1. a) $420,000 x 6 = $2,520,000.
b) Funds released = $420,000 x 2 = $840,000
Value of funds released on an annual basis =
$840,000 x 9 percent = $75,600
The company should not inaugurate the plan.
c) Value of funds released on an annual basis =
$420,000 x 9 percent = $37,800
The company should undertake the plan.
2. a) $3M a day x 0.5 days = $ 1.5M saved in collections
$2M + $1M - $2M = 1.0M increased balances
$ 0.5M net saving in cash
x .07 opportunity cost
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$35,000 annual saving
Van Horne and Wachowicz: Fundamentals of Financial Management, 12e 129
Chapter 9: Cash and Marketable Securities Management © Pearson Education Limited 2005
b) $2M x .07 = $140,000 opportunity cost of maintaining
$2M balance at New Orleans bank
- 35,000 savings under new arrangement
(see answer to part a)
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$105,000 maximum charge by New Orleans bank
3. If the company were certain of the pattern shown, it would wish to
have the following deposits in its payroll account in order to
cover the checks that were cashed:
Friday $ 30,000
Monday 60,000
Tuesday 37,500
Wednesday 15,000
Thursday 7,500
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$150,000
If employee check cashing behavior is subject to fluctuations, the
company will need to maintain "buffer" cash in the account. The
greater the uncertainty, the greater the buffer that will be
needed.
4. a) $5,000 x 41 stores x 6 days = $1,230,000
b) $15,000 x 41 = $615,000
$1,230,000 - $615,000 = $615,000
Van Horne and Wachowicz: Fundamentals of Financial Management, 12e 130
Chapter 9: Cash and Marketable Securities Management © Pearson Education Limited 2005
c) Interest earned = $615,000 x 10% = $61,500
Cost = 250 transfers x 41 stores x $7 cost = $71,750
As the cost exceeds the interest earned on the net released
funds, the arrangement would not be worthwhile. The transfers
are not large enough to offset the fixed cost.
5. No specific solution recommended.
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SOLUTIONS TO SELF-CORRECTION PROBLEMS
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1. a. Total time savings = 2.5 + 1 = 3.5 days
Time daily cash
savings X average collection = released
3.5 X $500,000 = $1,750,000
b. 5% X $1,750,000 = $87,500
c. Since the dollar gross benefit of the lockbox system ($87,500)
exceeds the cost of the lockbox system ($75,000), the system
should be initiated.
2.
Federal State Combined After-Tax
Security Tax Tax Effect Expected Return
Treasury bills .30 0 .30 (1 - .30)8.00% = 5.60%
Commercial
paper .30 .07 .37 (1 - .37)8.50% = 5.36%
Money-market
preferred stock .09* .07 .16 (1 - .16)7.00% = 5.88%
*(1 - .70)(.30) = .09
Van Horne and Wachowicz: Fundamentals of Financial Management, 12e 131
