Cash and Liquidity Management

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Presentation transcript:

Cash and Liquidity Management 20 Cash and Liquidity Management

Chapter 20 – Index of Sample Problems Slide # 02 - 09 Float Slide # 10 - 11 Cost of float Slide # 12 - 16 Lockbox net present value Slide # 17 - 21 BAT model Slide # 22 - 25 Miller-Orr model

2: Float On an average day, your firm receives 50 checks. These checks, on average, are worth $250 each. The average collection delay is 3 days. Also each day, your firm writes about 25 checks. These checks are worth an average of $400 and clear your bank in an average of 6 days. What is the amount of the collection float? What is the amount of the disbursement float? What is the amount of the net float?

3: Float

4: Float Your firm has decided to contract with only three customers who each pay you monthly as follows: Customer Check Amount Collection delay A $60,000 4 days B $40,000 5 days C $50,000 2 days What is the average daily float amount?

5: Float Item Amount Delay Total float $60,000  4 = $240,000 $40,000  5 = $200,000 $50,000  2 = $100,000 Total: $540,000

6: Float Your firm has decided to contract with only three customers who each pay you monthly as follows: Customer Check Amount Collection delay A $60,000 4 days B $40,000 5 days C $50,000 2 days What is the amount of the average daily receipts? What is the weighted average delay?

7: Float

8: Float Amount Weight Delay Weighted average delay $ 60,000 $ 60,000 60/150 = .4000 4 .400  4 = 1.6000 $ 40,000 40/150 = .2667 5 .2667  5 = 1.3335 $ 50,000 50/150 = .3333 2 .3333  2 = .6666 $150,000 1.000 Total = 3.6001

9: Float

10: Cost of float The Breadwinner Co. receives an average of $1,200 a day in checks. The average delay in clearing is 4 days. Currently, the applicable interest rate per day is .03%. What the is the present value of the float? What is the most this firm should pay to eliminate its collection float entirely? What is the highest daily fee this firm should pay to eliminate its collection float entirely?

11: Cost of float What the is the present value of the float?

12: Cost of float What is the most this firm should pay to eliminate its collection float entirely? What is the highest daily fee this firm should pay to eliminate its collection float entirely?

13: Lockbox net present value You are considering implementing a lockbox system and have gathered this information: Average daily lockbox payments = 1,200 Average size of payment = $750 Daily interest rate of Treasury bills = .01% Bank charge per check = $.21 Reduction in mail time = 1.5 days Reduction in processing time = 1.0 day Reduction in clearing time = .5 day What is the NPV of this lockbox arrangement?

14: Lockbox net present value See the next slide for another approach.

15: Lockbox net present value See the next slide for a slightly different approach.

16: Lockbox

17: BAT model Your firm utilizes $165,000 a week to pay bills. The standard deviation of these cash flows is $20,000. The fixed cost of transferring funds is $48 a transfer. The applicable interest rate is 6%. The firm has established a lower cash balance limit of $100,000. Answer these five questions using the BAT model: What is the optimal initial cash balance? What is the optimal average cash balance? What is the opportunity cost of holding cash? What is the trading cost of holding cash? What is the total cost of holding cash?

18: BAT model What is the optimal initial cash balance?

19: BAT model What is the optimal average cash balance? What is the opportunity cost of holding cash?

20: BAT model What is the trading cost of holding cash?

21: BAT model What is the total cost of holding cash?

22: Miller-Orr model Your firm utilizes $130,000 a week to pay bills. The standard deviation of these cash flows is $15,000. The fixed cost of transferring funds is $51 a transfer. Your firm has established a lower cash balance limit of $80,000. The weekly interest rate is .067%. Use the Miller-Orr model to answer these three questions. What is the optimal initial cash balance? What is the optimum upper limit? What is the average cash balance?

23: Miller-Orr model What is the optimal initial cash balance?

24: Miller-Orr model What is the optimum upper limit?

25: Miller-Orr model What is the average cash balance?

20 End of Chapter 20