No More Books Corporation has an agreement with Floyd Bank whereby the bank hand

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

Hi,

Please find the answer as follows:

Part A:

NPV = Value of Collections in a Day - [2*(Compensating Balance Required by Other 2 Banks) - Compensating Balance Required by the Current Bank] = 6800000 - [2*(290000) - 440000] = 6660000

Answer = 6660000

Part B:

Net Savings = Treasury Bill Rate*(Net Present Value) = 2.5%*6660000 = 166500

Answer = 166500

Thanks.s

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