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Considering the following company Wawa, which is a large food store based in California. a) Wawa is planning to use a lockbox system to speed
Considering the following company Wawa, which is a large food store based in California.
a) Wawa is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $25,000 plus 10 cents per transaction. The estimated reduction in collection and processing time is one day. The average customer payment in this region is $8,200. Treasury bills are currently yielding 5 percent per year. Assume a year has 365 days. Approximately how many customers each day, on average, are needed to make the system profitable for Wawa? (8 marks)
b)Wawas manager considers using a zero-balance account. Please explain how it might work and describe the advantage of doing so. (6 marks)
c) Suppose Wawa spends $52,000 a week to pay bills and maintains a lower cash balance limit of $80,000. The standard deviation of the disbursements is $7,500. The applicable weekly interest rate is 0.04 percent and the fixed cost of transferring funds is $50. What is the upper limit and the optimal average cash balance based on the Miller-Orr model? (6 marks)
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