If a company can implement cash management systems and save 3 days by reducing remittance time and 1 day by increasing disbursement time based on $2,000,000 in average daily remittances and $2,500,000 in average daily disbursements and their return on freed up funds is 10%, what is the max they should spend on the system?
A) $2,000,000
B) $650,000
C) $850,000
D) $1,000,000

Question

Quizplus · Accepted Answer

To calculate the max amount the company should spend on the system, we need to calculate the amount of savings they would generate from implementing the system.

For remittances: 
3 days x $2,000,000 = $6,000,000 in freed up funds 
$6,000,000 x 10% return = $600,000 in annual savings

For disbursements: 
1 day x $2,500,000 = $2,500,000 in freed up funds 
$2,500,000 x 10% return = $250,000 in annual savings

Total annual savings: $850,000

Assuming a payback period of three years or less, the max amount the company should spend on the cash management system would be around $2,550,000 ($850,000 x 3). Therefore, the best choice is C, $850,000.

If a Company Can Implement Cash Management Systems and Save