The cash manager of Bronco , inc. is contemplating the choice between using a wi

Question

The cash manager of Bronco , inc. is contemplating the choice between using a wire transfer and an EDT. She estimates that her investment opportunity rate is 10 percent. The banks ECR is currently 7 percent and reserve requirement is 10 percent. Her bank account officer informs her that a wire transfer will cost $ 20 and will provide collected balances one day earlier than the EDT which cost $.75. Further, assume that the transfer will occur during the middle of the week.

a. Assume that the balances transferred are above the balances required to compensate the deposit bank for services. Calculate the minimum transfer balance required to justify the use of a wire transfer.

b. Assume that the balances transferred are below the balances required to compensate the deposit bank. Calculate the minimum transfer balance required to justify the use of a wire transfer.

c.Why are the answers in two preceding parts different?

Create or write the formulas in the spreadsheet and show your work at arriving at your solutions

Explanation / Answer

I    = 10%

DS ( No of days served)    =   1

Banks earning credit rate, ecr when transferred more than rate = 0

Banks earning credit rate, ecr when transferred less than rate = 7 %

Required reserve rate rr = 10 %

Wire transfer cost          = 20%

Electronic depository cost (EDT)   = 0.75

TBAL   =                     Incremental Cost

               -------------------------------------------------

                 {DS/365} { i – [ECR ( 1 – RR)]}

       = $ 70262.5

In this case, ECR is not relevant,it is 0 since actual balance exceeds required compensating balance

Part 2

TBAL   =                     Incremental Cost

               -------------------------------------------------

                 {DS/365} { i – [ECR ( 1 – RR)]}

      = $ 189,898.65

Part 3

The differences in the answers above because in part (a) , the company transferred excess balances and did not lose bank ecr rate of 7% on the funds transferred, whereas in part (b) the ecr of 7% was lost, so the transfer balance had to be larger in order to break even.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.