The Solar Inc has daily cash receipts of $90,000. A recent analysis of

The Solar Inc has daily cash receipts of $90,000. A recent analysis of its collections indicated that customers’ payments were in the mail for an average of 4 days. Once received,the payments are processed in one and a half days.

After payments are deposited, it takes an average of two and a half days for these receipts to clear the banking system. If the firm’s opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee of $8,000 to reduce collection float by 2 days?
A) Yes, because it would only cost $8000 to save $19,800, netting the company $11,800.
B) Yes, because it would only cost $8000 to save $59,400, netting the company $51,400.
C) No, because it would cost $8000 to save $880, netting the company -$7,120.
D) Yes, because it would only cost $8000 to save $9,900, netting the company $1,900.

ANSWER

A