No More Books Corporation has an agreement with Floyd Bank whereby the bank hand
ID: 2624284 • Letter: N
Question
No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $3.6 million in collections a day and requires a $280,000 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 $1.8 million of collections a day, and each requires a compensating balance of $130,000. No More Books
No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $3.6 million in collections a day and requires a $280,000 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 $1.8 million of collections a day, and each requires a compensating balance of $130,000. No More Books
Explanation / Answer
1. The benefit of the new arrangement is the $3.6 million in accelerated collections since the new system will speed up collections by one day. The cost is the new compensating balance, but the company will recover the existing compensating balance, so:
NPV = $3,600,000
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