Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 Web site. Because of the wide geographical dispersion of the company's customers, it currently employs a lockbox system with collection centers in San Francisco, St. Louis, Atlanta, and Boston.

Steve Dennis, the company's treasurer, has been examining the current cash collection policies. On average, each lockbox center handles $185,000 in payments each day. The company's 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 Richmond's headquarters in Dallas to meet the company's 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 Corporation's total net cash flow from the current lockbox system 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 would make the company indifferent between the two systems?

*Please make answers as detailed as possible. I need longer explanations

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Recent Advances In Computational Finance

Authors: Nikolaos S. Thomaidis, Jr. Dash, Gordon H.

1st Edition

1626181233, 978-1626181236

More Books

Students also viewed these Finance questions