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Gale Supply estimates that its customers' payments are in the mail for 3 days, and once received they are processed in 2 days. After the payment sare deposited in the firm's bank, the funds are made available to the firm by the bank in 2.5 days. The firm estimates its total annual collections, received at a constant rate, from credit customers to be $87 million. Its annual opportunity cost of funds is 9.5 percent. Assume a 365-day year.
a. How many days of collection float does Gale Supply have?
b. What is the current annual dollar cost of Gale Supply's collection float?
c. If the installation of an electronic invoice presentment and payment (EIPP) system would result in a 4-day reduction in Gale's collection float, how much could the firm earn annually on this fl oat reduction?
d. Based on your findings in part (c), should Gale install the EIPP system if its annual cost is $85,000? Explain your recommendation.
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