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Cash Management at Richmond Corporation

Richmond Corporation was founded 20 years ago by its president, Daniel Richmond. 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 companys customers, it currently employs a lockbox system with collection centers in San Francisco, St. Louis, Atlanta, and Boston. Steve Dennis, the companys treasurer, has been examining the current cash collection policies. On average, each lockbox center handles $185,000 in payments each day. The companys current policy is to invest these payments in short-term marketable securities daily at the collection center banks. Every two weeks the investment accounts are swept and the proceeds are wire-transferred to Richmonds headquarters in Dallas to meet the companys payroll. The investment accounts each pay .068 percent per day and the wire transfers cost .20 percent of the amount transferred. Steve has been approached by Third National Bank, located just outside Dallas, about the possibility of setting up a concentration banking system for Richmond Corp. Third National will accept the lockbox centers 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 yield .075 percent per day. Each ACH transfer will cost $200. Daniel has asked Steve to determine which cash management system will be the best for the company. Steve has asked you, his assistant, to answer the following questions:

1.What is Richmond Corporations total net cash flowfrom the current lockbox system that is available to meet payroll?

2.Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?

3.What cost of ACH transfers could make the company indifferent between the two systems?