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The Robinson Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Robinson 's customers. Robinson 's
The Robinson Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Robinson 's customers. Robinson 's financial manager believes the new system would decrease its collection float by as much as three days. The new bank would require a compensating balance of $2,000,000, whereas its present bank has no compensating balance requirement. Additionally, the new bank will require a fixed annual fee of $300,000 each year to service the account. Robinson 's average daily collections are $1,000,000, and it can earn 4% on its short-term investments. Should Robinson make the switch? (Assume the compensating balance at the new bank will be deposited in a non-interest earning account.)
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