No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $2.7 million in collections a day and requires a $425,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its Eastern region so that two other banks will handle its business. Banks A and B each will handle $1.35 million of collections a day and each requires a compensating balance of $230,000. No More Books’ financial management expects that collections will be accelerated by one day if the Eastern region is divided. Should the company proceed with the new system? What will be the annual net savings? Assume that the T-bill rate is 5 percent annually.
NPV and Reducing Float
No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $2.7 million in collections a day and requires a $425,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its Eastern region so that two other banks will handle its business. Banks A and B each will handle $1.35 million of collections a day and each requires a compensating balance of $230,000. No More Books’
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