Average daily remittances are $5 million,and "extended disbursement float" adds 3 days to the disbursement schedule,how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds.
A) $500,000
B) $1,500,000
C) $1,000,000
D) $0

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of excess funds that the firm has due to the extended disbursement float:

3 days of float x $5 million in daily remittances = $15 million in excess funds

Next, we need to calculate the annual earnings on these excess funds:

$15 million x 10% = $1.5 million

Therefore, the firm should be willing to pay up to $1.5 million for a cash management system that can eliminate the extended disbursement float and maximize its earnings on excess funds. Choice B is the only option that matches this amount.

Average Daily Remittances Are $5 Million,and "Extended Disbursement Float" Adds