Question

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?

Short answer

The investment income generated from freed-up funds will be $436,500.

Step-by-step solution

Importance of the interest rates in short-term investments

The investor considers the interest rates offered on short-term investments to determine the interest income that can be earned by the investor. This rate influences the amount of money to be invested and the time period of investment

Money freed up by the cash management system.

The interest earned on short-term investments is $436,500.

$\begin{array}{rcl}\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{h}\mathit{o}\mathit{r}\mathit{t}\mathbf{-}\mathit{t}\mathit{e}\mathit{r}\mathit{m}\mathbf{}\mathit{i}\mathit{n}\mathit{v}\mathit{e}\mathit{s}\mathit{t}\mathit{m}\mathit{e}\mathit{n}\mathit{t}& \mathbf{=}& \mathit{F}\mathit{r}\mathit{e}\mathit{e}\mathit{d}\mathbf{}\mathit{u}\mathit{p}\mathbf{}\mathit{f}\mathit{u}\mathit{n}\mathit{d}\mathit{s}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\\ & \mathbf{=}& \mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{275}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{6}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{436}\mathbf{,}\mathbf{500}\end{array}$