Question

City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm’s checks will take longer to clear the bank. Collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?

Short answer

The company has earned $1,560,000 from short-term investments.

Step-by-step solution

Benefits of investing extra cash in short-term investments

It is beneficial to invest extra cash in short-term investments as the investor will be able to earn income in form of interest, and the liquidity of the organization will also not get affected.

Money freed up by the cash management system.

The interest earned on short-term investments is $1,560,000.

$\begin{array}{rcl}\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{h}\mathit{o}\mathit{r}\mathit{t}\mathbf{-}\mathit{t}\mathit{e}\mathit{r}\mathit{m}\mathbf{}\mathit{i}\mathit{n}\mathit{v}\mathit{e}\mathit{s}\mathit{t}\mathit{m}\mathit{e}\mathit{n}\mathit{t}& \mathbf{=}& \mathit{F}\mathit{r}\mathit{e}\mathit{e}\mathit{d}\mathbf{}\mathit{u}\mathit{p}\mathbf{}\mathit{f}\mathit{u}\mathit{n}\mathit{d}\mathit{s}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\\ & \mathbf{=}& \mathbf{\$}\mathbf{13}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{12}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{560}\mathbf{,}\mathbf{000}\end{array}$