RT 7 ShortTerm Financial Decisions Changing payment cycle On

RT 7 Short-Term Financial Decisions Changing payment cycle On accepting the position of chief executive officer and chairman of Muse, Inc., Dominic Howard changed the firm\'s weekly payday from Monday afternoon to the following Friday afternoon. The firm\'s weekly payroll was $100 million, and the cost of short-term] funds was 5%. If the effect of this change was to delay check clearing by 1 week, what annual savings, if any, were realized? P15-7

Solution

Check clearance is delayed not for one payment, but for all the payments that happens from now onwards. It is a perpertual benefit. On an annual basis 5% savings is realized.

Annual benefit = $100 million *5% = $5 million

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