Chapter 19Problems 1-12, Appendix 1-10

Input boxes in tanOutput boxes in yellowGiven data in blueCalculations in redAnswers in green

NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel.To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak" and "Solver Add-In."

NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel.To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak"

Chapter 19Question 1

Input Area:

Checks received 80 Value of checks $ 156,000 Days delayed 4 Days per month 30

Output:

Average daily float $ 20,800.00

Chapter 19Question 2

Input Area:

Value of checks $ 14,000 Clearing time 4 Received payment $ 26,000 Clearing time 2

b. New clearing time 1

Output:

a. Disbursement float $ 56,000 Collection float $ (52,000)Net float $ 4,000

b. Disbursement float $ 56,000 Collection float $ (26,000)Net float $ 30,000

Chapter 19Question 3

Input Area:

Value of checks per day $ 19,000 Clearing time 3 Interest rate 0.019%Days per month 30

Output:

a. Collection float $ 57,000

b. The firm should pay no more than $ 57,000 to eliminate the float.

c. Maximum daily charge $ 10.83

Chapter 19Question 4

Input Area:

Check #1 value $ 17,000 Check #2 value $ 6,000 Clearing time #1 4 Clearing time #2 5 # of days per month 30

Output:

Total float $ 98,000 Average daily float $ 3,266.67 Average daily receipts $ 766.67 Weighted average delay 4.26

Chapter 19Question 5

Input Area:

Average receipt $ 108 Decreased collection time 2 # Checks per day 8,500 Interest rate 0.016%Bank fee per day $ 225

Output:

Average daily collections $ 918,000 PV $ 1,836,000 Cost $ 1,406,250 NPV $ 429,750.00 The firm should take the lockbox service.

Annual savings $ 110,406.05 Annual cost $ 84,563.46 Annual net savings $ 25,842.59

Chapter 19Question 6

Input Area:

# Checks per day 5,300 % of check #1 60%Value of check #1 $ 55 Average delay check #1 2 % of check #2 40%Value of check #2 $ 80 Average delay check #2 $ 3

d. Interest rate 7%e. Weighted average float 1.50

# of days per month 30

Output:

a. Average daily float $ 28,620 On average, there is $ 28,620 that is uncollected and not available to the firm.

b. Total collections $ 344,500 Weighted average delay 2.49 Average daily float $ 28,620

c. The most the firm should pay is the total amountof the average float or $ 28,620

d. Daily interest rate 0.01854%Daily cost of float $ 5.31

e. Price to reduce float $ 17,225

Chapter 19Question 7

Input Area:

Average # of payments per day 385 Average value of payment $ 1,105 Variable lockbox fee $ 0.50 Daily interest rate on MM securities 0.02%Decreased collection time 3

Output:

a. PV $ 1,276,275

b. NPV $ 313,775

c. Net cash flow per day $ 62.76 Net cash flow per check $ 0.16

Chapter 19Question 8

Input Area:

# days to receive checks 6 Average daily collections $ 145,000 Required return 9%Decreased collection time 3 # of days per month 30 # of days per year 365

Output:

a. Reduction in outstanding cash $ 435,000

b. Average daily rate 0.0236%Dollar return $ 102.72

c. Monthly rate 0.7207%PV of increased collections $ 434,897.32 Assuming end of month payments:Monthly price $ 3,134.45

Assuming payments at the beginning of the monthMonthly price $ 3,112.02

Chapter 19Question 9

Input Area:

# days to clear checks 7 Average daily collections $ 93,000 Interest-bearing account 0.015%# weeks for checks to disburse 2

Output:

Annual interest earned $ 2,538.90

Chapter 19Question 10

Input Area:

Average daily collections $ 4,000,000 Compensating balance $ 400,000 T-bill rate 5%Bank A and Bank B:Collections per day $ 2,000,000 Compensating balance $ 250,000 Collections accelerated 1

Output:

NPV $ 3,900,000 Proceed with the new system.

Net savings $ 195,000

Chapter 19Question 11

Input Area:

Average # of payments per day 750 Average value of payment $ 980 Variable lockbox fee $ 0.35 Annual interest rate on MM securities 7.00%Fixed charges per year $ 5,000 Reduction in collection time 2 # of days per year 365

Output:

PV $ 1,470,000 Daily interest rate 0.019%NPV $ 54,015.17 The lockbox system should be accepted.

NPV (With the fixed charge) $ (17,413.40)The lockbox system should not be accepted.

Chapter 19Question 12

Input Area:

Annual fee $ 20,000 Variable costs per transaction $ 0.10 Reduction in collection 1 Average customer payment $ 5,300 T-bill rate 5%# of days per year 365 # weeks per year 52

Output:

Daily interest rate 0.0134%Customers per day 87.87

Chapter 19 - AppendixQuestion 1

Input Area:

Increase IDecrease DNo change N

Output Area:

a. D: this will lower the trading costs, which will cause a decrease in the target cash balance.b. D: this will increase the holding costs, which will cause a decrease in the target cash balance.c. I: this will increase the amount of cash that the firm has to hold in non-interest bearing

accounts, so they will have to raise the target cash balance to meet this requirement.d. D: if the credit rating improves, then the firm can borrow easier, allowing it to lower the target

cash balance and borrow if a cash shortfall occurs.e. I: if the cost of borrowing increases, the firm will need to hold more cash to protect against

cash shortfalls as the borrowing costs become more prohibitive.f. D: this depends somewhat on what the fees apply to, but of direct fees are established, then the

compensating balance may be lowered, thus lowering the target cash balance. If, on the otherhand, fees are charged to the number of transactions, then the firm may wish to hold a highercash balance so they are not transferring money into the account as often.

D: this will lower the trading costs, which will cause a decrease in the target cash balance.D: this will increase the holding costs, which will cause a decrease in the target cash balance.I: this will increase the amount of cash that the firm has to hold in non-interest bearingaccounts, so they will have to raise the target cash balance to meet this requirement.D: if the credit rating improves, then the firm can borrow easier, allowing it to lower the target

I: if the cost of borrowing increases, the firm will need to hold more cash to protect againstcash shortfalls as the borrowing costs become more prohibitive.D: this depends somewhat on what the fees apply to, but of direct fees are established, then the compensating balance may be lowered, thus lowering the target cash balance. If, on the otherhand, fees are charged to the number of transactions, then the firm may wish to hold a highercash balance so they are not transferring money into the account as often.

Chapter 19 - AppendixQuestion 2

Input Area:

Annual interest rate 6%Fixed order cost $ 25 Total cash needed $ 8,500

Output Area:

C* $ 2,661.45

The initial balance should be $ 2,661.45 , and whenever the balance drops to $0, another $ 2,661.45 should be transferred in.

Chapter 19 - AppendixQuestion 3

Input Area:

Avg. daily cash balance $ 1,300 Total cash needed $ 43,000 Interest rate 5%Replenishing cost $ 8

Output Area:

Holding cost $ 65.00 Trading cost $ 132.31 Total cost $ 197.31 C* $ 3,709.45 They should change their average dailycash balance to $ 1,854.72 , which would minimize their costs. Thenew total costs are $ 185.47

Chapter 19 - AppendixQuestion 4

Input Area:

Total cash needed $ 16,000 Transfer amount $ 1,500 Interest rate 5%Replenishing cost $ 25

Output Area:

Opportunity cost $ 37.50 Trading cost $ 266.67

The firm keeps too little in cash because the trading costs are higher than the opportunity costs.

C* $ 4,000.00

Chapter 19 - AppendixQuestion 5

Input Area:

Cash holding $ 690,000 Cash needed per month $ 140,000 Broker fee $ 500 Interest rate 5.7%

Output Area:

Total cash $ 1,680,000 C* $ 171,679.02 The company should invest $ 518,320.98 of its current cash holdings in marketable securitiesto bring the cash balance down to the optimal level.Over the rest of the year, sell securities

9.79 times.

Chapter 19 - AppendixQuestion 6

Input Area:

Lower limit $ 43,000 Upper limit $ 125,000 Target balance $ 80,000

Output Area:

The lower limit is the minimum balance allowed in the account, and the upper limit is the maximum balance allowed in the account. When the account balance drops to the lower limit, in marketable securities will be sold, and the proceeds deposited in the account. This moves the account balance back to the target cash level. When the account balance rises to the upper limit, then

$45,000 of marketable securities will be purchased. This expenditure brings the cash levelback down to the target balance of $80,000

The lower limit is the minimum balance allowed in the account, and the upper limit is the maximum balance allowed in the account. When the account balance drops to the lower limit, $37,000in marketable securities will be sold, and the proceeds deposited in the account. This moves the account balance back to the target cash level. When the account balance rises to the upper limit, then

of marketable securities will be purchased. This expenditure brings the cash level

Chapter 19 - AppendixQuestion 7

Input Area:

Order fixed cost $ 40 Opportunity cost 0.021%Standard deviation of CF $ 70 Lower limit $ 1,500

Output Area:

Variance of cash flows 4,900

C* $ 2,387.90 U* $ 4,163.71

When the balance in the cash accounts drops to$1,500 , the firm sells

$887.90 of the marketable securities. The proceeds from thesale are used to replenish the account back tothe optimal level of C*. Conversely, when the upper limit is reached, the firm buys

$1,775.81 of marketable securities. This expenditure lowers the cash level back down to the optimal level of

$2,387.90

Chapter 19 - AppendixQuestion 8

Output Area:

As the variance increases, the upper limit and the spread will increase, while the lower limit remainsunchanged. The lower limit does not change because it is an exogenous variable set bymanagement. As the variance increase, however, the amount of uncertainty increases. When this happens, the target cash balance, and therefore the upper limit and the spread, will need to be higher.If the variance drops to zero, then the lower limit, the target balance, and the upper limit will al be the same.

As the variance increases, the upper limit and the spread will increase, while the lower limit remainsunchanged. The lower limit does not change because it is an exogenous variable set bymanagement. As the variance increase, however, the amount of uncertainty increases. When this happens, the target cash balance, and therefore the upper limit and the spread, will need to be higher.If the variance drops to zero, then the lower limit, the target balance, and the upper limit will al be

Chapter 19 - AppendixQuestion 9

Input Area:

Variance of cash flows $ 890,000 Opportunity cost 7%Lower limit $ 160,000 Order fixed cost $ 300

Output Area:

Daily interest rate 0.0185%

C* $ 170,260.47 U* $ 190,781.41

Chapter 19 - AppendixQuestion 10

Input Area:

Target cash balance $ 2,700 Toal cash for year $ 28,000 Order cost $ 10

Output Area:

Interest rate 7.68%