Currently James Corporation is using a decentralized collection system whereby customers mail their checks to one of the firm’s eight regional locations.  Its annual sales are $150 million.  Checks are deposited each business day in a local bank and the amount of the deposit is sent to the firm’s concentration bank in Dallas.  The average time between deposit in the local bank and the availability of those funds, in Dallas, to Riley is 6 days.  James has determined that the use of wire transfers would reduce the float by four days, but the transfer will cost $15.00.  If transfers will be made on each of the 250 days that banks are open, should Riley switch to the wire transfer system?  Assume that James can earn 6% on the funds released through this more efficient transfer.

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Asked Dec 12, 2019
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Currently James Corporation is using a decentralized collection system whereby customers mail their checks to one of the firm’s eight regional locations.  Its annual sales are $150 million.  Checks are deposited each business day in a local bank and the amount of the deposit is sent to the firm’s concentration bank in Dallas.  The average time between deposit in the local bank and the availability of those funds, in Dallas, to Riley is 6 days.  James has determined that the use of wire transfers would reduce the float by four days, but the transfer will cost $15.00.  If transfers will be made on each of the 250 days that banks are open, should Riley switch to the wire transfer system?  Assume that James can earn 6% on the funds released through this more efficient transfer.

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Expert Answer

Step 1

Calculation of Total Benefits:

The total benefits is $68,630.14.

Excel Spreadsheet:

...
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A B 1 Annual Sales 2 Transfer Cost $150,000,000 $15.00 3 Interest Rate 6% 4 Transfer Days 5 Total Days 6 Reduction in Float (days) 7 Number of Locations 8 Released Funds Earnings 9 Additional Expenses 250 365 4 $98,630.14 $30,000.00 10 Total Benefits S68,630.14

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Corporate Valuation

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