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Q > Evans Co has average daily cash outflows of $3m. A new cash management system can add two days to the cash payments schedule. Evans can earn 10% per annum on surplus funds.
What is the maximum amount that Evans should be willing to pay each year for this cash management system?
$3,000,000
$1,500,000
$600,000
$150,000—–X—- one Small doubt in this — when we have avg $3m cash flow daily, this mean this is for whole year 365 days. then why we only calculate daily figure not annually e.g– 3m x 365
if we are getting cash for 2 days then why not calculate for only 2 days for eg 2/365 x 10%
basically why there is no pro rate?? —-x— i’m not able to understand this by my own.
This is from Study Hub Quiz Qs, chapter 15.Because the question asks for
What is the maximum amount that Evans should be willing to pay EACH YEAR for this cash management system?
Is this the exact question?
yes, this qs is from acca study hub quizz – ch 15.
my doubt is still not clear – when we are talking about what evan co should pay each year, then why not we take annual cash figure? why avg daily cash figure.
we are calculating interest on annually percentage. why it is not pro rated – adjusted to 2 day ? my doubt may be sound silly but i’m confused.$600,000 allowed for new cash management system. Here is how it is done:
You are happy that the ave daily c/flows = $ 3,000,000
It states that the days added are × 2
So this is funds of $6,000,000 and if the earning rate on excess funds is 10% then
0.1 * $6,000,000 = $600,000
Why are you trying to calculate a 2 day rate?
Think about it logically
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