Final answer:
The value of the annual savings by reducing the cash collection process by 1.5 days for McCain Corp. would be $11,096. If this speed-up is permanent, the present value of these savings would be $1,369,867.
Step-by-step explanation:
The question is asking for the value of the annual savings that the McCain Corp. could realize by cutting 1.5 days from their cash collection process, given their annual sales are $30 million and the opportunity cost of funds is 9 percent. Additionally, it asks how much the savings would be worth if the speed-up in collections can be considered permanent.
To calculate the annual savings, we first determine the daily sales. With annual sales of $30 million, daily sales are $30 million divided by 365 days, which is approximately $82,192. Next, the savings from speeding up the collection by 1.5 days is this daily sales figure multiplied by 1.5 days. The final step is to account for the opportunity cost of 9 percent.
Annual savings from faster collections: $82,192 × 1.5 days = $123,288.
Value of annual savings at 9% opportunity cost: $123,288 × (9/100) = $11,096.
If these savings are considered permanent, the present value of the savings could be calculated as a perpetuity, which is the annual savings divided by the opportunity cost (using the formula for perpetuity present value: PV = C / r).
Present value of perpetual savings: $123,288 / 0.09 = $1,369,867.