No More Books Corporation has an agreement with Floyd Bank whereby the bank hand
ID: 2707909 • Letter: N
Question
No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $6.8 million in collections a day and requires a $440,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $3.4 million of collections a day, and each requires a compensating balance of $290,000. No More Books
No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $6.8 million in collections a day and requires a $440,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $3.4 million of collections a day, and each requires a compensating balance of $290,000. No More Books
Explanation / Answer
What is the NPV of accepting the system?
NPV = Value of Collections in a Day - [2*(Compensating Balance Required by Other Banks) - Compensating Balance Required by the Current Bank]
= 6800000 - (580000 - 440000)
= 6660000
Annual Net Savings = Treasury Bill Rate*NPV
= 2.5%*6660000
= 166500
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