6. An assessment of a centralized versus decentralized collection system Suppose the Physical Hazard Insurance Group (PHIG), a Connecticut-based insurer conducting business in all 50 states, currently uses a centralized collection system that requires all policyholders to send their monthly, quarterly, or annual premiums to PHIG's office in Hartford, Connecticut. Under the current system, it takes an average seven days for PHIG's premium checks to be received at the Hartford office and another four days to be processed by PHIG's Premium Processing Department. Once the checks are deposited in the Hartford bank, it takes an average of eight days for the in-state and out-of-state checks to be cleared and made available to PHIG. On average, PHIG receives per year 300,000 premium payments, which total $700,000,000 in annual premiums. The Hartford bank, which does not require a compensating balance, charges a monthly fee of $1,400 and $0.15 per payment. Complete the following table for PHIG's current centralized system: Current Centralized Collection System Total collection time Total annual cost 19 days $61,800 Atlas Financial Services Inc., a bank based in V, Missouri, is offering to create and $46,200 operate a decentralized collection system for tablishing five regional collection bank accounts at its San Francisco, Denver, Dallas, $51,900 a, and Atlanta branches. Notice that these regional branch accounts, which are located across the country in cities with Federal Reserve Banks, were selected to reduce the mail time required to return the funds to Hartford. These locations also create two alternatives for the movement of collected funds from the five concentration accounts to the master collection account: either by mailing a check or by wiring the funds to the Kansas City account. Under Atlas's mail-based proposal, the mail time from the customer to the regional concentration banks will be reduced to three days, and since the payments will be sent directly to the banks, the payment-processing time is reduced to one day. Each week, each concentration bank will send a list of customer names, policy numbers, and payment amounts to PHIG's Hartford office to be posted separately from the payments to the customers' accounts. Since the payments are cleared relatively locally, through the regional concentration banks, the check-clearing delay is reduced to three days. Each regional concentration bank will then mail a check to the master concentration account at Atlas's Kansas City branch. The funds will be available to PHIG two days after receipt from the concentration bank. Atlas has offered to operate this system for $1,200 per month plus $0.125 per payment and a compensating balance of $50,000 in each of the six Atlas branches. Funds kept on deposit as compensating balances cannot be invested in marketable securities, and should any funds be released by the decentralized system, they will be invested in marketable securities to yield 14.00% before taxes. Complete the following table for the proposed decentralized system: Proposed Decentralized Collection System Total collection time Total reduction in collection time Using the previous information, complete the table that follows and determine whether PHIG should change to the decentralized collection system. (Note: Assume a 365-day year in your calculations and round your final answers to the nearest dollar.) Comparison of the Current Centralized and the Proposed Decentralized System Average daily collections Amount of funds released Annual pretax earnings on released funds Total annual cost of the proposed system Net benefit of the proposed system Should Physical Hazard Insurance Group (PHIG) invest in the proposed system? Why or why not? Yes, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is negative. No, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is negative. No, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is greater than or equal to zero. Yes, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is greater than or equal to zero. Under the mail-based proposal, the mail time from the customer to the regional concentration banks will be reduced to three days, the payment-processing time is reduced to one day, and the check-clearing delay is reduced to three days. Each regional concentration bank will then mail a check to the master concentration account in Kansas City. Funds will be available to PHIG two days after their receipt from the concentration bank. The proposed system will cost $1,200 per month plus $0.125 per payment and will require a compensating balance of $50,000 in each of the six bank branches. Any funds released by the decentralized system will be invested in marketable securities to yield 14.00% before taxes. 6. An assessment of a centralized versus decentralized collection system Suppose the Physical Hazard Insurance Group (PHIG), a Connecticut-based insurer conducting business in all 50 states, currently uses a centralized collection system that requires all policyholders to send their monthly, quarterly, or annual premiums to PHIG's office in Hartford, Connecticut. Under the current system, it takes an average seven days for PHIG's premium checks to be received at the Hartford office and another four days to be processed by PHIG's Premium Processing Department. Once the checks are deposited in the Hartford bank, it takes an average of eight days for the in-state and out-of-state checks to be cleared and made available to PHIG. On average, PHIG receives per year 300,000 premium payments, which total $700,000,000 in annual premiums. The Hartford bank, which does not require a compensating balance, charges a monthly fee of $1,400 and $0.15 per payment. Complete the following table for PHIG's current centralized system: Current Centralized Collection System Total collection time Total annual cost 19 days $61,800 Atlas Financial Services Inc., a bank based in V, Missouri, is offering to create and $46,200 operate a decentralized collection system for tablishing five regional collection bank accounts at its San Francisco, Denver, Dallas, $51,900 a, and Atlanta branches. Notice that these regional branch accounts, which are located across the country in cities with Federal Reserve Banks, were selected to reduce the mail time required to return the funds to Hartford. These locations also create two alternatives for the movement of collected funds from the five concentration accounts to the master collection account: either by mailing a check or by wiring the funds to the Kansas City account. Under Atlas's mail-based proposal, the mail time from the customer to the regional concentration banks will be reduced to three days, and since the payments will be sent directly to the banks, the payment-processing time is reduced to one day. Each week, each concentration bank will send a list of customer names, policy numbers, and payment amounts to PHIG's Hartford office to be posted separately from the payments to the customers' accounts. Since the payments are cleared relatively locally, through the regional concentration banks, the check-clearing delay is reduced to three days. Each regional concentration bank will then mail a check to the master concentration account at Atlas's Kansas City branch. The funds will be available to PHIG two days after receipt from the concentration bank. Atlas has offered to operate this system for $1,200 per month plus $0.125 per payment and a compensating balance of $50,000 in each of the six Atlas branches. Funds kept on deposit as compensating balances cannot be invested in marketable securities, and should any funds be released by the decentralized system, they will be invested in marketable securities to yield 14.00% before taxes. Complete the following table for the proposed decentralized system: Proposed Decentralized Collection System Total collection time Total reduction in collection time Using the previous information, complete the table that follows and determine whether PHIG should change to the decentralized collection system. (Note: Assume a 365-day year in your calculations and round your final answers to the nearest dollar.) Comparison of the Current Centralized and the Proposed Decentralized System Average daily collections Amount of funds released Annual pretax earnings on released funds Total annual cost of the proposed system Net benefit of the proposed system Should Physical Hazard Insurance Group (PHIG) invest in the proposed system? Why or why not? Yes, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is negative. No, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is negative. No, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is greater than or equal to zero. Yes, because the differential net benefit, calculated as the net benefit of the proposed system minus the net benefit of the current system, is greater than or equal to zero. Under the mail-based proposal, the mail time from the customer to the regional concentration banks will be reduced to three days, the payment-processing time is reduced to one day, and the check-clearing delay is reduced to three days. Each regional concentration bank will then mail a check to the master concentration account in Kansas City. Funds will be available to PHIG two days after their receipt from the concentration bank. The proposed system will cost $1,200 per month plus $0.125 per payment and will require a compensating balance of $50,000 in each of the six bank branches. Any funds released by the decentralized system will be invested in marketable securities to yield 14.00% before taxes