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1.Community Hospital has annual net patient revenues of $150 million.At the present time, payments received by the hospital are notdeposited for six days on average. The hospital is exploring alockbox arrangement that promises to cut the six days to one day. Ifthese funds released by the lockbox arrangement can be invested at 8percent, what will the annual savings be? Assume the bank fee will be$2,000 per month.

Averagedaily revenue = $150,000,000/365 days

Averagedaily revenue = $410,958.90

DaysReduced = 365 days/6 days = 60 days

Ifaverage daily revenue is $410,958.90, we multiply this by 6 days,hence,

$410,958.90*6days = $2,465,753.4

Ifthese funds released by the lockbox arrangement can be invested at 8percent, so

$$2,465,753.4*0.08= $197,260,272

AnnualSavings = $197,260,272 * 60 days = __$11,835,616.32__

2.St. Luke’s Convalescent Center has $200,000 in surplus funds thatit wishes to invest in marketable securities. If transaction costs tobuy and sell the securities are $2,200 and the securities will beheld for three months, what required annual yield must be earnedbefore the investment makes economic sense?

Iftransaction costs to buy and sell the securities are $2,200 and thesecurities will be held for three months, then, total securities in ayear is $2200*4 (quarterly), then total buy and sell securities is$8800. $2200 is 25% of $8800. Hence, the required annual yield toearn before the investment makes economic sense should be greaterthan 25%. Hence, required annual yield should be greater than$250,000.

3.Your firm is considering the following three alternative bank loansfor $1,000,000:

a)10 percent loan paid at year end with no compensating balance

b)9 percent loan paid at year end with a 20 percent compensatingbalance

c)6 percent loan that is discounted with a 20 percent compensatingbalance requirement

Assumethat you would normally not carry any bank balance that would meetthe 20 percent compensating balance requirement. What is the rate ofannual interest on each loan?

a)$1,000,000 * 10% = $100,000

Rateof annual interest without compensating balance = 10%

b)$1,000,000 * 9% = $90,000

Compensatorybalance = $1,000,000 * 20% = $200,000

$90,000/($1,000,000- $800,000) = $90,000/$200,000 = 0.45

Rateof annual interest without compensating balance = 9.45%

c)$1,000,000 * 6% = $60,000

Compensatorybalance = $1,000,000 * 20% = $200,000

$60,000/($1,000,000- $800,000) = $60,000/$200,000 = 0.3

Rateof annual interest without compensating balance = 6.3%

4.An important source of temporary cash is trade credit, which does notactually bring in cash, but instead slows its outflow. Vendors oftenprovide discounts for early payment. What is the formula to determinethe effective interest rate if the discount is not utilized?

r= e^{i}– 1

Source:

Internationallawoffice.com.(2014). *Controllingpurchase prices: the locked box mechanism – International Law Office*.[online] Retrieved from:http://www.internationallawoffice.com/newsletters/detail.aspx?g=26d192e2-b5ba-4ad1-b237-447a12e918a0[Accessed: 30 Mar 2014].