Sitmore and Dolittle, Inc., has 41 retail clothing outlets scattered throughout the country. Each outlet sends an average of $5,000 daily to the head office in South Bend, Indiana, through checks drawn on local banks. On average, it takes six days before the company's South Bend bank collects the checks. Sitmore and Dolittle is considering an electronic funds transfer arrangement that would completely eliminate the float.
a. What amount of funds will be released?
b. What amount will be released on a net basis if each local bank requires an increase in compensating balances of $15,000 to offset the loss of float?
c. Suppose that the company could earn 10 percent interest on the net released funds in Part (b). If the cost per electronic transfer were $7 and each store averaged 250 transfers per year, would the proposed arrangement be worthwhile? (Assume that the cost of issuing checks on local banks is negligible.)