(Cash management) As CFO of Portobello Scuba Diving Inc., you are asked to look into the possibility of implementing a
Posted: Thu Apr 28, 2022 1:51 pm
(Cash management) As CFO of Portobello Scuba Diving Inc., you
are asked to look into the possibility of implementing a system to
expedite cash receipts from clients. Portobello receives check
remittances totaling $26 million in a year. The firm records and
processes 15,000 checks in the same period. The National Bank of
Brazil has informed you that it could provide the service of
expediting checks and associated documents for a unit cost of $0.20
per check. After conducting an analysis, you project that the cash
freed up by the adoption of the system can be invested in a
portfolio of near-cash assets that will yield an annual
before-tax return of 10 percent. The company usually uses a
365-day year in its financial calculations.
a. What reduction in check collection time is necessary for
Portobello to be neither better nor worse off for having adopted
the proposed system?
b. How would your solution to part a be affected if Portobello
could invest the freed-up balances at an expected annual return of
only 5 percent?
c. What is the logical explanation for the differences in your
answers to part a and part b?
are asked to look into the possibility of implementing a system to
expedite cash receipts from clients. Portobello receives check
remittances totaling $26 million in a year. The firm records and
processes 15,000 checks in the same period. The National Bank of
Brazil has informed you that it could provide the service of
expediting checks and associated documents for a unit cost of $0.20
per check. After conducting an analysis, you project that the cash
freed up by the adoption of the system can be invested in a
portfolio of near-cash assets that will yield an annual
before-tax return of 10 percent. The company usually uses a
365-day year in its financial calculations.
a. What reduction in check collection time is necessary for
Portobello to be neither better nor worse off for having adopted
the proposed system?
b. How would your solution to part a be affected if Portobello
could invest the freed-up balances at an expected annual return of
only 5 percent?
c. What is the logical explanation for the differences in your
answers to part a and part b?