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Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit; and it keeps its central billing system there. On average, it takes 5 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 2 days-bringing it down to 3 days. HGC receives an average of $2,200,000 in payments per day.

a) How much free cash would HGC generate if it implemented the lockbox system? Round your answer to the nearest cent.

b) Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow?


c) How would growth affect your answer?
If the firm grows, cash flow 1) would be a one-time cash flow, 2) would increase by the differential growth, 3) would decrease by the differential growth

d) If HGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis? Round your answer to the nearest cent.

e) What is the maximum monthly charge HGC should pay for the lockbox system? Round your answer to the nearest cent.

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Keith Leannon
Keith LeannonLv2
29 Sep 2019

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Time Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 1.5 days. Based on the following information, should the lockbox system be adopted? Average number of payments per day 800 Average value of payment $ 750 Variable lockbox fee (per transaction) $ .15 Annual interest rate on money market securities 5.5 % How would your answer change if there were a fixed charge of $5,000 per year in addition to the variable charge? Assume 365 days per year

CASH MANAGEMENT AT RICHMOND CORPORATION:

Richmond Corporation was founded 20 years ago by its president, Daniel Richmond. The company originally began as a mail-order company but has grown rapidly in recent years, in large part due to its Web site. Because of the wide geographical dispersion of the company's customers, it currently employs a lockbox system with collection centers in San Francisco, St. Louis, Atlanta, and Boston.

Steve Dennis, the company's treasurer, has been examining the current cash collection policies. On average, each lockbox center handles $185,000 in payments each day. The company's current policy is to invest these payments in short-term marketable securities daily at the collection center banks. Every two weeks the investment accounts are swept, and the proceeds are wire-transferred to Richmond's headquarters in Dallas to meet the company's payroll. The investment accounts each pay .068 percent per day, and the wire transfers cost .20 percent of the amount transferred.

Steve has been approached by Third National Bank, located just outside Dallas, about the possibility of setting up a concentration banking system for Richmond Corp. Third National will accept the lockbox centers' daily payments via automated clearinghouse (ACH) transfers in lieu of wire transfers. The ACH-transferred funds will not be available for use for one day. Once cleared, the funds will be deposited in a short-term account, which will yield .075 percent per day. Each ACH transfer will cost $200. Daniel has asked Steve to determine which cash management system will be the best for the company. Steve has asked you, his assistant, to answer the following questions:

1. What is Richmond Corporation's total net cash flow from the current lockbox system available to meet payroll?

2. Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?

3. What cost of ACH transfers would make the company indifferent between the two systems?

I just need part E the rest has been answered

Mississippi Delta, Inc. has been selling switching equipment to computer companies on net-30 terms, in which payment is expected by 30 days from the invoice date. Concerned about deteriorating collection patterns, the credit manager has divided customers into two groups for examination purposes: Prompt payors and laggards. Prompt payors (80 percent of Mississippi Delta’s customers) pay, on average, in 35 days, versus a 72-day average for the laggards. The manager wonders if the credit terms should be modified to include a 2 percent cash discount on invoices paid within 10 days. The average invoice is the same for both groups, roughly $4,000. The manager expects 50% of the prompt payors to pay in exactly 10 days and the average on the other half to slip to 40 days. He thinks that 20% of the laggards will pay in 10 days and the average on the others will slip to 80 days. Given these forecasts, he is not sure that the lost revenue from discount takes (who would then pay only 98% of the invoiced dollar amount) justifies the improved collection. The company’s annual cost of capital is 11%. A.) Using NPV calculations, show the PV of the present collection experience. B.) Calculate the NPV of the proposed 2/10, net-30 terms. C.) Based on your NPV analysis, should Mississipi Delta Inc. adopt the cash discount? D.) What other factors should be taken into account before Mississippi Delta Inc. makes a switch, assuming such is justifiable on an NPV basis? E.) Sensivity analysis involves varying the key assumptions, one at a time, and observing the effect on the key decision criterion-such as profits or NPV. In the NPV analysis above, how could could one carry out sensitivity analysis? (If you have a financial spreadsheet available, conduct a sensitivity analysis that varies the number of prompt payors who will pay in exactly 10 days and report your findings.) *** Answer in an Excel document and give explanation as to how and why you got to your answer View comments (1) Expert Answer snarulatutor snarulatutor answered this 48 minutes later Was this answer helpful? 1 0 1,896 answers Since, there are multiple questions, the first four have been answered. ___________ Part A) To calculate the NPV, we need to determine the values of cash flows. Cash Flow on the 35th Day = Invoice Value*Customer Percentage Making the Payment on 35th Day = 4,000*80% = 3,200 Cash Flow on the 72th Day = Invoice Value*Customer Percentage Making the Payment on 72th Day = 4,000*20% = 800 The net present value of these 2 cash flows can be calculated as follows: Net Present Value = 3,200/(1+11%/365)^35 + 800/(1+11%/365)^72 = $3,949.26 ___________ Part B) To calculate the NPV, we need to determine the values of cash flows. Cash Flow on 10th Day = Invoice Value*Customer Percentage Taking Discount*(1-Discount Percentage) = 4,000*80%*50%*(1-2%) + 4,000*20%*20%*(1-2%) = $1,724.80 Cash Flow on 40th Day = Invoice Value*Customer Percentage Making Payment on 40th Day = 4,000*40% = $1,600 Cash Flow on 70th Day = Invoice Value*Customer Percentage Making Payment on 40th Day = 4,000*20%*80% = $640 The net present value of these 3 cash flows can be calculated as follows: Net Present Value = 1,724.80/(1+11%/365)^10 + 1,600/(1+11%/365)^40 + 640/(1+11%/365)^70 = $3,927.08 ___________ Part C) The net present value of cash flows with discount ($3,927.08) is less than the net present value of cash flows without discount ($3,949.26). Therefore, the company should not adopt the cash discount. ___________ Part D) Some of the other factors that should be taken into consideration include the possibility of default risk (as the credit period in case of laggards has increased to 80 resulting in higher probability of default). Another factor to be considered is the payment terms available from the suppliers. The company can adopt a cash discount policy, if it is also getting a discount on early payments to its suppliers. Credit policies used within the industry or by other companies of the same nature and size can be used as reference points while devising a credit policy.

I just need part E) and it explained

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