Clearwater Glass Company examined its cash management policy and found that it takes an average of five days for checks that the company writes to reach its bank and thus be deducted from its checking account balance-that is, disbursement delay, or float, is five days. On the other hand, it is an average of four days from the time Clearwater Glass receives payments from its customers until the funds are available for use at the bank-that is, collection delay, or float, is four days. On an average day, Clearwater Glass writes checks that total $70,000, and it receives checks from customers that total $80,000.
a. Compute the disbursement float, collection float, and net float in dollars.
b. If Clearwater Glass has an opportunity cost equal to 10 percent, how much would it be willing to spend each year to reduce collection delay (float) by two days? (Hint: Assume any funds that are freed up will be invested at 10 percent annually.)