Major manufacturing company currently has one bank account located in Nairobi to

Question

Major manufacturing company currently has one bank account located in Nairobi to handle all its collections. The firm keeps a compensating balance of Sh.30 Million to pay for these services. It is considering opening a bank account in Mombasa to speed up collections from its coastal region based customers. Major estimates that the mombasa Account would reduce collection time by 1 day on th Sh100 million a day of business that it does with its coastal based customers. If it opens tye account, it can reduce the compensating balance with Nairobi Bank to Sh.20 Million since it will do less business in Nairobi. However, Mombasa bank Will require a compensating Balance of Sh.20 Million.

Required:
Should the company Open the new account?

Explanation / Answer

Answer:

Yes, as it reduce the collection time normally require, and due to which company will mainain proper working capital and company will redce the interest expenses and it will pay the its creditor timely. since now company will have to maintain bank balance of $40 million instead of $30 million but compnay will be able to reduce its collection time which is important.

conclusion

Yes company should open new Bank account

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

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