The Premiums Abound Insurance Company (PAIC), 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 PAIC's office in Hartford, Connecticut. Under the current system, it takes an average of seven days for PAIC's premium checks to be received at the Hartford office and another four days to be processed by PAIC'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 PAIC. On average, PAIC receives per year 350,000 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 $1,800 and $0.15 per payment. Complete the following table for PAIC's current centralized system: Current Centralized Collection System Total collection time 19 days Total annual cost The Strongbox Banking Group, a bank based in Kansas City, Missouri, is offering to create and operate a decentralized collection system for PAIC by establishing five regional collection bank accounts at its San Francisco, Denver, Dallas, Philadelphia, 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. Strongbox has offered to operate this system for $1,200 per month plus $0.10 per payment and a compensating balance of $50,000 in each of the six Strongbox branches. It will also charge $20 per wire transfer and expects to remit the collected funds to Kansas City every other day (approximately 182 times per year). 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 12.00% 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 PAIC 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 collection Amount of funds released Annual pretax earnings on released funds Total annual cost of the proposed system Net benefit of the proposed system Should Premiums Abound Insurance Company (PAIC) invest in the proposed system? Why or why not? O 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. 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. O 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. O Yesbecause the differential net benefit. calculated as the net benefit of the proposed system minus the net The Premiums Abound Insurance Company (PAIC), 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 PAIC's office in Hartford, Connecticut. Under the current system, it takes an average of seven days for PAIC's premium checks to be received at the Hartford office and another four days to be processed by PAIC'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 PAIC. On average, PAIC receives per year 350,000 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 $1,800 and $0.15 per payment. Complete the following table for PAIC's current centralized system: Current Centralized Collection System Total collection time 19 days Total annual cost The Strongbox Banking Group, a bank based in Kansas City, Missouri, is offering to create and operate a decentralized collection system for PAIC by establishing five regional collection bank accounts at its San Francisco, Denver, Dallas, Philadelphia, 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. Strongbox has offered to operate this system for $1,200 per month plus $0.10 per payment and a compensating balance of $50,000 in each of the six Strongbox branches. It will also charge $20 per wire transfer and expects to remit the collected funds to Kansas City every other day (approximately 182 times per year). 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 12.00% 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 PAIC 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 collection Amount of funds released Annual pretax earnings on released funds Total annual cost of the proposed system Net benefit of the proposed system Should Premiums Abound Insurance Company (PAIC) invest in the proposed system? Why or why not? O 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. 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. O 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. O Yesbecause the differential net benefit. calculated as the net benefit of the proposed system minus the net
