Cash Management at Donaghy Corporation

Donaghy Corporation was founded 20 years ago by its president, Jack Donaghy. The company originally began as a mail-order company, but has grown rapidly in recent years, in large part due to its website. Because of the wide geographical dispersion of the company's customers, it currently employs a lockbox system with collec- tion centres in Vancouver, Calgary, Toronto, and Montreal.

Liz Lemon, the company's treasurer, has been examining the current cash collection policies. On average, each lockbox centre handles $193,000 in payments each day. The company's current policy is to invest these payments in short-term marketable securities daily at the collection centre banks. Every two weeks, the invest- ment accounts are swept; the proceeds are wire-transferred to Donaghy's headquarters in Winnipeg to meet the company's payroll. The investment accounts each earn .012 percent per day, and the wire transfers cost .20 percent of the amount transferred.

Liz has been approached by the Royal Canadian Bank about the possibility of setting up a concentration banking system for Donaghy Corp. Royal Canadian will accept each of the lockbox centre's daily payments via automated clearinghouse (ACH) transfers in lieu of wire transfers. The ACH-transferred funds will not be available for use for one day. Once cleared, the funds will be deposited in a short-term account, which will also yield .012 percent per day. Each ACH transfer will cost $150. Jack has asked Liz to determine which cash man- agement system will be the best for the company. As her assistant, Liz has asked you to answer the following questions:

Questions

1. What is Donaghy Corporation's total net cash flow available from the current lockbox system to meet payroll?

1. Under the terms outlined by the bank should the company proceed with the concentration banking system?
2. What cost of ACH transfers would make the company indifferent between the two systems?