Scott, the treasury manager of Weiland Inc., is in the process of developing cas

Question

Scott, the treasury manager of Weiland Inc., is in the process of developing cash transfer rules for the firm. Currently, the firm’s bank charges $15 per wire and $0.50 per EDT. The EDT takes 1 day longer to clear. Scott believes that the firm’s current investment-opportunity rate is 4%. T he firm does not currently earn earnings credits on account balances.

a. What is the minimum transfer balance that justifies a wire transfer?

b. Suppose that Scott has negotiated an ECR of 0.5% on account balances (the RRR is 10%). What is the minimum transfer balance that justifies a wire transfer?

c. Suppose that a year later, Scott renegotiates with the firm’s lender so that the new ECR is 0.75% (the RRR is still 10%). Would Scott need to revise the transfer rule? If so, what would the revised minimum transfer be?

Explanation / Answer

A) Minimum Balance that justifies Wire Transfer :

15 - 0.5 = Min(Bal)*(4%*1/365)

Min (Bal) = 14.5*365/0.04 = $132,312.5

B) TBAL = (15 - 0.5) / 1*(4% - 0.5%*(1-10%))/365 = $ 149,084.507

C) Yes, he needs to revise transfer rule

TBAL = (15- 0.5) / 1*(4% - 0.75%*(1-10%))/365 = $159,172.932

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