Valentino S.p.A., is a vertically integrated, international manufacturer and retailer of women’s clothing, headquartered in Milan, Italy. Currently, the firm has no coordinated cash management system. A proposal, however, from Banca d’Italia aimed at speeding up cash collections is being examined by of Valentino’s corporate executives.

The firm currently uses a centralized billing procedure, which requires that all checks be mailed to the Milan head office for processing and eventual deposit. Under this arrangement all the customers’ remittance checks take an average of 6 business days to reach the head office. Once in Milan, another 1 day is required to process the checks for ultimate deposit at the Banca d’Italia.

The firm’s daily remittances average €1.2 million. The average check size is €6,000. Valentino currently earns 8 percent annually on its marketable-securities portfolio. Under the proposed plan, Banca d’Italia said that they could reduce funds tied up by mail float to 3 days, and processing float will be eliminated. Funds would then be transferred twice each business day by means of automated depository transfer checks (DTC) from three local banks to the Banca d’Italia. Each DTC costs €18. These transfers will occur all 270 business days of the year. Each check processed through the proposed cash collection system will cost €0.20.

a. What amount of cash balances will be freed up if Valentino S.p.A adopts the system suggested by Banca d’Italia?

b. What is the opportunity cost of maintaining the current banking setup?

c. Should Valentino adopt the new system? Compute the net annual gain or loss associated with adopting the system.