If average daily remittances are $6 million, and "extended disbursement float" adds two days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 7% on excess funds?
A)$500,000
B)$1,500,000
C)$0
D)$840,000

Question

Quizplus · Accepted Answer

The extended disbursement float adds two days to the disbursement schedule, which means that the firm's average daily remittance is being held for two extra days before being credited to their account.

Thus, the amount of cash that the firm has on hand is on average $6 million multiplied by 2 days, which equals $12 million.

If the firm earns 7% on excess funds, they would earn $840,000 ($12 million x 7%) if they invest the funds during those two extra days.

Therefore, the firm should be willing to pay up to $840,000 for a cash management system that can help them take advantage of the extended disbursement float.

If Average Daily Remittances Are $6 Million, and "Extended Disbursement