Exman Company performed a study of its billing and collection procedures and found that an average of 8 days elapses between the time when a customer’s payment is received and when the funds become usable by the firm. The firm’s annual sales are $540 million.
a. Assuming that Exman could reduce the time required to process customer payments by 1.5 days, determine the increase in the firm’s average cash balance.
b. Assuming that these additional funds could be used to reduce the firm’s outstanding bank loans (current interest rate is 8 percent) by an equivalent amount, determine the annual pretax savings in interest expenses.