16.1 The checks that Park Place writes create disbursement float, which is “good” float. The clinic has $1,000 x 4 days = $4,000 in disbursement float. The checks that the clinic receives create collections float, which is “bad” float. The clinic has $1,000 x 3 days = $3,000 in collections float. The clinics net float is $1,000: Net float = Disbursement (good) float – Collections (bad) float = $4,000 – $3,000 = $1,000. In essence, the balance on the firm’s books is $1,000 less than the balance shown on the bank’s books.

16.2 a. The annual cost of operating the lockbox system is $103,350:

Total cost = (Fixed cost per month x 12) + (Number of locations x Number of transfers x Cost per transfer) = ($6,500 x 12) + (10 x 260 x $9.75) = $78,000 + $25,350 = $103,350.

b. The annual benefit is $97,500:

Benefit = Number of days saved x Payments per day x Carrying cost = 3 x $325,000 x 0.10 = $97,500.

c. In this situation, the annual cost of the lockbox system is greater than the annual benefit, and hence the lockbox system should not be initiated.

16.3 a. Seattle must pay the bills in 20 days if it wants to take advantage of the discount of three percent. If it wants to take the costly trade credit (forego the discount), it must pay the bills in 60 days.

b. Using the approximate cost formula, the cost is 27.8%.

Discount percent 360
Approximate % cost = ────────────── = ────────────────────── 100 - Discount percent Days credit received - Discount period

3 360 = ── = ─── = 0.278 = 27.8%. 97 40

Note that the periodic cost rate is 3 / 97 =