Holooly Plus Logo
Holooly Plus Logo

Question 19.2: Instead of eliminating the float, suppose Lambo can reduce i...

Instead of eliminating the float, suppose Lambo can reduce it to one day. What is the maximum Lambo should be willing to pay for this?

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

If Lambo can reduce the float from three days to one day, then the amount of the float will fall from $3,000 to $1,000. From our discussion immediately preceding, we see right away that the PV of doing this is just equal to the $2,000 float reduction. Lambo should be willing to pay up to $2,000.

Related Answered Questions

Question: 19.3

Look back at Example 19.2. A large bank is willing to provide the float reduction service for $175 per year, payable at the end of each year. The relevant discount rate is 8 percent. Should Lambo hire the bank? What is the NPV of the investment? How do you interpret this discount rate? What is the ...

Verified Answer:

The PV to Lambo is still $2,000. The $175 would ha...
Question: 19.4

In our example concerning Atlantic Corporation’s proposed lockbox system, suppose Pacific Bank wants a $20,000 fixed fee (paid annually) in addition to the 25 cents per check. Is the system still a good idea? ...

Verified Answer:

To answer, we need to calculate the PV of the fixe...
Question: 19.1

Suppose you have $5,000 on deposit. One day, you write a check for $1,000 to pay for books, and you deposit $2,000. What are your disbursement, collection, and net floats? ...

Verified Answer:

After you write the $1,000 check, you show a balan...
Question: 19.S-TP.1

Float Measurement On a typical day, a firm writes checks totaling $3,000. These checks clear in seven days. Simultaneously, the firm receives $1,700. The cash is available in two days on average. Calculate the disbursement, collection, and net floats. How do you interpret the answer? ...

Verified Answer:

The disbursement float is 7 days × $3,000 = $21,00...